Experts say the threat of a Treasury clampdown on pensions recycling will not be enough to stop individuals exploiting tax loopholes.
From next April, anyone aged 55 or over will be able to access their pension pots in full, creating a potential tax avoidance opportunity running to billions of pounds.
Savers could use salary sacrifice to avoid paying employer and employee national insurance, as well as collecting tax relief on their contributions.
They will then be able to immediately withdraw the money from their pension pot, subject to marginal rates, without ever having paid NI or income tax.
The Treasury has already cracked down on the annual tax-free allowance on pension contributions, reducing it from £40,000 a year to just £10,000 after savers have first dipped into their pot, to mitigate the leakage.
Labour is calling for the Treasury to review salary sacrifice next year to assess whether there is any evidence of tax avoidance.
Responding to questions during a House of Commons Taxation of Pensions Bill committee session last week, Treasury financial secretary David Gauke said: “The idea that we should have a zero annual allowance and say anyone who has made use of these flexibilities should no longer be able to contribute to a pension would be unfair on those people.
“We have sought to balance two competing objectives of fairness for those who have accessed their pension flexibly but wish to continue to contribute with fairness in ensuring this doesn’t create a tax loophole which is expensive to the general taxpayer.
“We will continue to monitor this and if we see evidence of abuse in this area we will take further action.”
He added: “It is clearly in the interests of the Treasury and the general taxpayer this is not something that is exploited at rapid cost, in which case the balance would shift and the Government would look to take further action.”
But experts say the remarks are not enough to deter the loophole being used as any action would not be retrospective.
Towers Watson senior consultant David Robbins says: “The Treasury position seems to be: ‘we don’t mind if a few people do it but if lots of people do it and we start losing serious money, then we will have to do something about it’. Rich people will still think they have nothing to lose by trying it out.
“I would like to know how big a loss would trigger action and what action that would be.”
Murphy Associates partner Adrian Murphy says: “Anything the Treasury does will not be retrospective. As long as you are working within the rules it could not come back and ask for tax back. It could close it in the future.
“It wouldn’t deter us from advising on it, we would just be aware of the possibility that we might not be able to do it at some point in the future.”