Pensions experts have raised concerns that draft pension tax rules published today risk creating a fresh pension recycling loophole.
Last month, the Government introduced rules to allow annuity payments to decrease, freeing up providers to develop more flexible retirement income products in the wake of the Budget.
The Treasury also confirmed it will introduce a £10,000 annual allowance for those who choose to access their pension from age 55, minimising the appeal of a tax loophole some feared would be exploited.
But experts warn the draft Taxation of Pensions Bill published today keeps the loophole open for those purchasing an annuity.
Speaking on condition of anonymity, one pension technical expert says the rules do not trigger a reduction in annual allowance where a retiree makes use of new annuity flexibilities.
He says: “The new rules allow annuities to increase and decrease. The only requirement is that there has to be an income for life. So if you look at the example of someone with £100,000, they could set up an annuity with a payment of £99,000 in the first year, leaving £1,000 to provide an income for life.
“In doing so their annual allowance won’t drop to £10,000. Someone doing the equivalent in a flexi-access pension would see their allowance drop.”
It means that the full annual allowance of £40,000 could be used to recycle cash back into the pension.
Experts are understood to be in discussions with Government to determine whether the loophole will be closed.
Another expert warns: “It would appear that reduction in a customer’s annual allowance is not triggered when they purchase a lifetime annuity.
“If companies build an annuity that pays a large lump sum immediately and the remainder is spread out then it could be possible to recycle.”
A statement from HMRC says: “We have been discussing this with industry stakeholders as part of our consultation. We don’t want to put unnecessary restrictions in place, but we will take action if it is required.”