NAPF warns Treasury over pension lump sum

The Treasury is being warned off plans it may have to close the tax-free cash concession on pension funds that rewards savers for locking their money for up to 40 years by the National Association of Pension Funds and the Confederation of British Industry.

Pension contributions receive tax relief to encourage people to tie money up in a pension fund they cannot access until they retire. The Treasury then recoups its revenue by taxing retirement income, but it allows savers to take up to 25 per cent of a pension fund as a tax-free lump sum.

Peter Thompson, the chairman of NAPF, wrote to Ruth Kelly, the financial secretary to the Treasury, and Andrew Smith, the secretary of state for Work and Pensions yesterday, after mounting speculation the Government is considering abolishing this tax-free lump sum as part of a review of pension legislation.

The CBI calculates the cost to private sector employees of removing the tax-free concession could be up to £14bn a year. Digby Jones, the director general of the CBI, speaking tonight in Cambridge at the CBI East of England annual dinner, will urge the Chancellor to quash rumours the tax break will be removed.

"This would be a deeply unpopular proposal that would totally undermine plans people have made for retirement. It could be seen as punishing people who have bothered to make plans. It also sends out the wrong message at a time when we need to be encouraging people to make proper provision for their retirement," Mr Jones will say.

Mr Thompson said tax-free cash was a "highly valued concession" and asked for Government reassurance it is not considering such a move.

The Government is due to produce a Green Paper on pension reform this Autumn. The Inland Revenue has been working on simplifying the way pensions are taxed for two years and would like the concession to end.