The UK's "failing" pension system needs to be radically overhauled and simplified to make it as attractive to consumers as saving into Isas, a report from the Institute of Directors said today.

People have been paying around double the amount into Isas as they have into pensions, showing which type of saving they prefer and showing how public faith in pensions is dwindling, the report argues.

It says the current pension system has become complex and unattractive, having been bogged down by a "forest of regulation".

The amounts paid into Isas rose from £35.7 billion in 2007 to £43.9 billion in 2009-10, while employee and individual pension contributions peaked in 2007 at £25.6 billion. By 2009 that figure had fallen to £22.9 billion.

Malcolm Small, senior adviser on pensions policy at the institute and report author, says: "The fact that so many people are either not saving at all for retirement, or moving to other investment vehicles such as Isas, is a stark illustration that the current architecture has lost public confidence.

"If we are to avoid millions of people facing poverty in old age, then we need to give them an attractive structure to save into, not simply order them to save."

Call for retirement age rise

The report, titled Roadmap For Retirement Reform, calls for the state retirement age to be raised to 70 more quickly, increasing it in stages to reach 70 in 2044 rather than the Government's plans to raise the age to 68 in 2046.

The report says: "We need to stop pretending to people that state or private pension architectures were ever designed to support a potential 30-year 'retirement' from an effective 35-year working life."

The report argues a higher state retirement age will encourage private saving for those wanting to end their working lives earlier.

It calls for the Government to develop a formal savings policy, saying society has moved more towards a "debt culture" over the last 40 years.

Auto-enrolment

The recommendations come before a landmark government initiative to tackle the pension savings crisis, beginning this autumn. Between nine and 10 million people will be automatically enrolled into pension schemes, something the Government hopes will lead to a greater savings culture.

Official figures recently showed that the proportion of people in a workplace pension has fallen below half for the first time in at least 15 years.

Some 48% of employees are in a scheme, compared with 55% when the records began in 1997, the Office for National Statistics says.

The National Association of Pension Funds (NAPF) has warned the squeeze on household incomes and stock market volatility has put people off saving into a pension.

A recent NAPF study found that more than half of workers (54%) were not confident in pensions compared with other ways of saving.

According to government estimates, between two and four million people will opt out of auto-enrolment, leaving five to eight million newly saving or saving more.