No surprise that Isas more popular than pensions

We have come a long way with providing tax-friendly savings alternatives to pensions in the past 25 years.

First we had the Pep, launched in 1987, on the back of the privatisation splurge. We then had John Major launch a cash-based complement to Peps in 1990, the tax-exempt special savings account that allowed you to save £9000 in five years.

Along the way we saw the launch of single company Peps in January 1992, and the merger of the Pep and Tessa regimes in April 2008. A year later the Isa regime was born, one that remains firmly in place today and seems to be thriving. Indeed, with the launch of Junior Isas, Isas have become very much a family savings affair.

There is no doubt that Isas now play a key role in the savings system. There are two main reasons for this.

First, confidence in the pensions industry has been hit by the countrywide closure of defined benefit pension schemes and their replacement by inferior defined contribution schemes. And who can forget the scandal of pension scheme wind ups that left people without the pensions they thought were guaranteed.

On top of this we have had constant government meddling in pensions (whether it is through the application of lifetime allowances or linking pension increases with the consumer prices index rather than the retail prices index). The result of all this meddling is widespread confusion, consumer uncertainty and a complex rule book that makes pensions nigh impossible to understand – unless of course you are a top actuary.

The greedy pensions industry has also not helped itself by taking unjustified charges often dressing them up in language designed to deceive – active member discounts being the classic example of this.

And, of course, many people are now struggling to turn their pension pots into lifetime income as a result of rock-bottom annuity rates. With quantitative easing here to stay for the foreseeable future, together with rising longevity rates and onerous solvency requirements being imposed on life insurers, low annuity rates are not going to go away.

In light of all this bad noise it is not surprising that accomplished journalist Merryn Somerset Webb, writing in last weekend’s FT Money section, posed the following question: ‘Can you think of a single reason why the UK pensions industry should exist?’ Her answer? “I have thought about it. And I cannot.’ It is difficult to disagree with her conclusion.

So it is obvious that Isas have benefited at the expense of pensions. But Isas have thrived for their own reasons. In an ever-increasing complex financial world, Isas are one of the few vehicles which have been lucky enough to benefit from a reduction in the rules that govern them.