UK- The National Association for Pension funds and the Confederation of British Industry have warned the government against scrapping one of the most significant tax benefits for pensions.

The industry is alarmed at rumours the government is planning to abolish the tax benefit that allows people to take a tax-free lump sum on retirement.

At present, members of DC schemes, including stakeholder and private pensions, can take a quarter of their final pension pot tax free. Those in DB schemes are entitled to cash in the equivalent of one and a half times their final salary, tax free.

But a team at the Inland Revenue charged with writing a report on simplifying the pension system is believed to be under pressure from the Treasury to recommend either abolishing or cutting the entitlement.

Chairman of the NAPF Peter Thompson has written a letter to financial secretary to the Treasury Ruth Kelly expressing his concern at the rumours. In it he said: “the government has declared its wish to shift the increasing burden of pension provision more on to the private sector and individuals.

“The NAPF is surprised that the government appears to consider that this may be achieved by making the tax treatment of pensions less attractive than it has been at any time in the last eighty years.”

Digby Jones, director general of the CBI says the move would be unpopular and not help retirement plans. He said the government has “already caused enough problems with removal of the dividend tax credit. Removing the tax-free lump sum would make matters worse.”

The Treasury says it will make its views know once the Inland Revenue has published its report on simplifying the tax on pensions.

Rumours of scrapping the tax benefit have drawn criticism from those working in the industry. Mike Fosberry, head of pensions at Smith & Williamson, says: “surely Gordon Brown has taxed what are supposed to be tax exempt funds enough by taking away the ability to reclaim tax on dividends some years ago. This is just another example of the stealth tax industry he has spawned.”