Tax law and pension funds: Letter

Sir: Following the article "NAPF chief proposes to end tax free nest eggs" (3 May), I wish to clarify NAPF's position in regard to changes in the tax treatment of retirement lump sums and investment income. In most UK schemes, the current taxation system provides advantage for the scheme members at the point of retirement whereas an improvement in the tax treatment of investment income would usually pass on to the employer. That could be inequitable.

The current regime is entirely defensible because schemes invest heavily in UK equities and the current combination of ACT and mainstream corporation tax, where both are payable, results in an effective tax rate of 16.66 per cent on distributable earnings. Even before the iniquitous change in 1993, dropping ACT to 20 per cent, the effective rate of tax was 11.11 per cent. It is wrong to claim that pension funds are truly tax free. In essence we pay tax on part of our investment income and it is therefore entirely justifiable that part of our benefits are tax-free. NAPF has not proposed any changes to this structure, nor does it intend to.

Tom Ross

Chairman

National Association of

Pension Funds Limited

London SW1