Loophole allows savers to avoid pension emergency tax bill

Alan Chan, director and chartered financial planner at London-based IFS Wealth & Pensions, said while he is aware of this solution he feels that isn't always practical to take this approach to avoiding an emergency tax charge.

This type of solution "can sometimes lead to higher costs as some providers charge fixed fees for each pension account or withdrawal fees," he said.

He added: "The amount of paperwork required to do this would be a significant obstacle in itself.

"Also, the small pots rule can only be used three times (three separate pots), after which it can't be used again, so it is not a real solution.

"A simpler way could be to spread the pension withdrawal over two payments instead of a one-off lump sum. 

"The client can make a small withdrawal initially, say £500, and then once the correct tax code has been issued by HMRC, there would be no need to employ emergency tax on the pension and so the correct tax will be taken off the second withdrawal for the remainder sum."

The Office for Tax Simplification suggested last month that HMRC should review the current rules around pension drawdown.

Old Mutual Wealth's Mr Browne agreed that this is what the tax office needs to do.

He said: "I think it would be good for HMRC to review how ad hoc withdrawals for pensions are taxed."