THE pensions industry reacted with dismay this week as the Chancellor cut the annual limit on tax-free pension contributions by one-fifth to £40,000 and the lifetime limit by one-sixth to £1.25 million.

But elsewhere, there was a welcome for the lifting of ISA limits, their extension to children's savings, and the scrapping of a 2009 restriction on income drawdown for pensioners.

Ros Altmann, director-general of Saga, welcomed the move on income drawdown.

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She said: "In the past three years, the Treasury and the Bank of England have introduced policy changes to income drawdown which have slashed the private pension income of many retired people by more than one-third. This change will hopefully see these savers able to get back some of the unfair income reductions they have suffered."

But she said the Chancellor had missed the opportunity to help savers suffering from low interest rates by allowing the full ISA allowance, rather than only half of it, to be put into cash.

Tony Vine-Lott at the Tax Incentivised Savings Association welcomed the confirmation that the annual ISA contribution limit would rise in line with the consumer prices index. "For the first time, the increase is being extended to JISAs and CTFs [child trust fund] and will provide a welcome boost to children's savings," Mr Vine-Lott said.

He added: "We are particularly pleased there is to be a consultation on AIM shares and ISAs. It has always seemed to us to be inequitable for these investments to be excluded from a stocks and shares ISA and we have made constant representations to have this changed. The ISA model is a huge success and we must do all we can to build on its popularity to encourage people to save in order to better afford their short and longer term financial needs."

Andy Creak, director at new investor platform rplan, said: "With all the focus on pensions, it's easy to forget that ISAs offer a much more flexible alternative for retirement planning. In fact, over 49% of the adult UK population has an ISA, and around 28% has a pension.

"In other words, people are voting with their feet and choosing ISAs over pensions for their savings."

Mr Creak added: "It is time the financial services industry recognised what people really want and stop trying to force them to buy products they don't actually like – just because they are better for the industry."

But the tax raid on pensions was called "a direct blow to the pensions savings culture" byAlison Fleming, head of pensions at PwC in Scotland.

She said : "By reducing both the annual allowance and lifetime allowances, the likelihood is the few remaining private sector defined benefit schemes will be under more pressure to close as they become more complex and expensive to run."

Joanne Segars, chief executive at the National Association of Pension Funds, said: "The Chancellor is wrong to say the changes will only affect those at the top of the wage tree. People in a final salary pension who have worked loyally for the same employer for years and then get a pay rise, or a promotion, could end up with a tax bill of several thousand pounds."

Patrick Connolly, certified financial planner at AWD Chase de Vere, said: "We work with many clients who have invested smaller pension contributions when they were younger and are now trying to play catch-up with larger payments as they start to approach retirement.

"We also see clients whose pension entitlements have been slashed following the break-up of a marriage and are trying to invest more to rebuild this back up.

"Even for those who are making smaller, or no, pension contributions, and who we want to engage through auto-enrolment, it becomes more difficult to get them interested when they see constant meddling with the rules and regulations."