Changes to rules around withdrawing small pension pots as lump sums could lead to large scale abuse of the system, Hargreaves Lansdown has warned.
Today the Treasury announced it would extend the rules which allow people to withdraw occupational pension pots of below £2,000 as lump sums to include personal pensions as well.
The Treasury had originally restricted the commutation of small pots to occupational schemes because these required an employer to be set up, and so were harder to arrange as part of a scam.
Personal pensions have no such restriction, and for this reason, the Treasury said investors can only commute two £2,000 personal pots over their lifetime, to prevent abuse.
But Tom McPhail, head of pensions research at Hargreaves Lansdown, said the two-pot limit may not stop some people setting up "granny farming" scams.
In these situations, an individual could convince people aged 60 and above to place £1,600 into personal pensions.
This would attract a further £400 in tax relief, and the pot could then be commuted.
As many pensioners do not pay income tax due to their higher threshold of at least £9,940, the pension would be cashed tax free.
The £400 in tax relief could then be split between the pensioner and the intermediary, McPhail said.
Multiplied over hundreds of people, a scam of this kind could generate thousands of pounds in misappropriated tax relief.
A spokesperson for Her Majesty's Revenue and Customs (HMRC) said: "These are draft regulations put out for comment.
"They are meant to help schemes pay out very small pension funds that can not be annuitised or combined with other funds.
"The lump sums are taxable at marginal rate, except for any element used to pay a tax free lump sum (up to 25% of the fund). We welcome any feedback or comments on the draft regulations to help ensure they operate as the Government intends."
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