ABI commissioned research, published this morning (June 23), found the current system benefitted higher earners in particular and was less favourable towards women, the lower paid and younger workers.
When paying into a pension savers receive tax relief on any contributions they make and under the current system tax relief is paid at the highest rate of income tax any saver pays.
According to the research, carried out by the Pensions Policy Institute (PPI), basic rate taxpayers paying 20 per cent in income tax make up 83.4 per cent of total taxpayers but only receive 26 per cent of the pensions tax relief related to defined contribution pensions.
It also found the number of people earning less than £30,000, who qualify for tax relief, increased from 52 percent to 62 percent due to automatic enrolment. However, only 24 percent of tax relief goes to them.
As well as being entitled to a higher rate of relief, higher earners are likely to have more cash available to put into their pension than lower earners, further highlighting the skew towards this group of savers, the research stated.
Furthermore, the system is biased when it comes to age, as almost half (42 per cent) of people who contribute to a DC pension are under 40, but they only receive 27 per cent of the available tax relief.
People in their 40s and 50s receive two and a half times as much tax relief from the government.
Meanwhile, 71 per cent of DC pension tax relief goes to men as they pay 69 per cent of the contributions, further highlighting the ongoing gender pensions gap.
The PPI and ABI suggested making a small change to the system could help solve these inequalities.
The organisations suggested changing the current system to a single flat rate of relief would increase the amount of pensions tax relief for the basic rate taxpayer from 26 per cent to a more equal 42 per cent.
Yvonne Braun, director of long-term savings and protection at the ABI, said a change to the system was needed to make it simpler and fairer to all earners and encourage saving for retirement.
She said: “Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving. However, the distribution of pensions tax relief under the current system exacerbates existing inequalities, particularly between men and women.
“We hope the research will provide food for thought on how to make the system simpler and fairer.”