Financial advisers are taking advantage of a loophole in small pots lump sums rules that they are being warned could be considered aggressive avoidance in a breach of HM Revenue & Customs rules.
Since 2014, investors can withdraw up to three small pensions of up to £10,000 each in their life, and these lump sums are not tested against the lifetime allowance.
This rule "is intended for people who have ended up with small pension pots, perhaps from short periods of employment", Jessica List, pension technical manager at Curtis Banks, said.
The rules give savers a way to access those benefits "without going through the possible cost and fuss of transferring or accessing them through more traditional methods such as an annuity", she added.
However, financial advisers are now considering artificially creating small pots by transferring three lots of £10,000 into new pension arrangements.
Ms List said: "This effectively gives them an extra £30,000 of lifetime allowance, saving up to £16,500 (the amount of tax which would have applied if the £30,000 was paid as a lifetime allowance excess lump sum).”
The lifetime allowance represents the maximum amount of money a saver can save in their pension pot - and benefit from tax relief at their marginal rate - before incurring an additional tax charge of up to 55 per cent.
The lifetime allowance will increase by £30,000 from April 2018 to £1.03m, since it was announced in the Budget 2015 that from 2018 to 2019 the allowance will be increased by inflation, as measured by the consumer prices index.
Ms List argued that while the creation of artificial small pots "is possible within the legislation, it is not within the spirit of the rules".
She said: "We believe there is a risk that HMRC could deem this an avoidance exercise, particularly if it thinks the rule is being widely misused."
HMRC has declined to comment on this matter.
Nevertheless, the taxman has described the differences between tax avoidance and tax planning.
Tax avoidance is a practice that "involves bending the rules of the tax system to gain a tax advantage that parliament never intended".
HMRC describes it as "often involving contrived, artificial transactions that serve little or no purpose other than to produce this advantage".
"It involves operating within the letter – but not the spirit – of the law. Most tax avoidance schemes simply do not work, and those who engage in it can find they pay more than the tax they attempted to save once HMRC has successfully challenged them."
Tax planning, on the other hand, "involves using tax reliefs for the purpose for which they were intended, for example, claiming tax relief on capital investment, or saving via Isas or for retirement by making contributions to a pension scheme".
HMRC added: "However, tax reliefs can be used excessively or aggressively, by others than those intended to benefit from them or in ways that clearly go beyond the intention of parliament.
"Where this is the case it is right to take action, because it is important that the tax system is fair and perceived to be so.”