Getting rid of the tax-free lump sum, which is the one advantage pensions have over other forms of saving such as Isas, is going to be counter-productive

NAPF spokesman

Peter Thompson, chairman of the National Association of Pension funds (NAPF), has written to Treasury Financial Secretary Ruth Kelly asking for reassurance that the Inland Revenue will not scrap the law.

The government is due to launch its green paper shortly outlining its future pension policy, and there has been reports suggesting the tax-free lump sum could be abolished as part of a range of reforms.

Critics say scrapping the lump sums would act as a major disincentive to save into a pension fund, and would cause outrage among investors, whose pension income is already being buffeted by turbulent stock markets - and poor annuity rates.

Current rules

Under current rules, the amount members of a company pension scheme can take as a tax-free lump sum depends on length of service and is up to a maximum of one and a half times their final salary.

It would be certifiably stupid to abolish the tax free lump sum

Steve Webb MP, Liberal Democrats

While normally members of personal pensions and stakeholder schemes can take up to 25% of their fund tax-free.

If you are a member of a group personal pension or a group stakeholder plan, you can take up to 25% of your fund tax-free.

A spokesman for the NAPF told BBC News Online: "If they are serious about encouraging people to save for retirement, getting rid of the tax-free lump sum which is the one advantage pensions have over other forms of saving, is going to be counter-productive."

The NAPF's members have nearly �700 billion funds under management and represent about a quarter of all investment in UK equities.

Steve Webb MP, Shadow Work and Pensions Secretary, said it would be "certifiably stupid to abolish the tax free lump sum".

"Public confidence is at an all time low. Measures to encourage people to invest in pensions are needed.

"Taking away one of the most attractive features of private pensions is sheer madness."