The Treasury has threatened to clampdown on pensions recycling amid concerns the tax loophole could cost the Exchequer billions of pounds.
Under the new flexibilities announced in the March Budget, anyone aged 55 or over will be able to take their entire pension pot as cash from April next year.
The reforms create a tax loophole, however, as savers could use pension 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 cut the annual allowance for tax-free pension saving from £40,000 to £10,000 for those who access their pot flexibly to reduce the risk of people using the reforms to cut their tax bill. However, industry estimates suggest £2bn could still be lost to the Exchequer as a result of people exploiting the loophole.
Responding to questions during a House of Commons Taxation of Pensions Bill committee session this morning, 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 we think 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 that 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.”