The Association of British Insurers (ABI) said the savers’ bonus would top up pension deposits at a rate of £1 for every £2 or £3 paid in and should replace existing pension tax relief arrangements.

At the moment, basic rate taxpayers receive £1 of relief for every £4 paid in, while higher rate payers get £2 of relief for every £3 put in.

The ABI said the current system is too complex, and benefits the wealthiest savers the most. The body is calling for a simpler and more transparent system, which would help both savers and employers.

The ABI believes the savers’ bonus would encourage personal responsibility by targeting savings incentives to lower and middle income earners.

The organisation also analysed proposals to switch to a pension ISA and found the move would carry a number of risks that outweigh potential benefits.

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It said the shift would be costly (taking over 50 years to fully implement), put employer contributions (which account for around 75% of all pension contribution tax relief) at risk, place a disproportionate financial burden on the working population (by removing tax paid on pension payments) and reduce savings incentives as savers may not trust future governments not to reintroduce tax on pension income.

The proposal forms part of the ABI’s submission to the government’s consultation on pensions tax reform. The report draws on consultation with pension providers, analysis from the Pensions Policy Institute, the National Institute of Economic and Social Research (NIESR), Populus consumer surveys and a review of academic research.

“While there is no ‘silver bullet’ solution to replacing the current complex pensions tax relief system, it is clear that no change is not an option, and a savers’ bonus, based on a single rate of tax relief meets the Government’s reform principles,” said Dr Yvonne Braun, the ABI’s director of long-term savings policy.

“In contrast, our forensic analysis of the options concludes that introducing pension ISAs risks dissuading people from saving for their retirement, would be costly and complex to implement, and hit economic growth.”

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