Pension savers have shifted nearly half a billion pounds into offshore schemes in an attempt to avoid tax rates of up to 82% on their funds.
HM Revenue & Customs (HMRC) has revealed that more than 7,300 people have transferred pension assets totalling £432m to offshore schemes since the ability to do so was introduced in April 2006. The figures were disclosed in response to a Freedom of Information Act request from Sipp provider AJ Bell.
The transfers have been made to qualifying registered overseas pension schemes (Qrops), based abroad and approved by HMRC.
Pension experts warn against using Qrops schemes to avoid UK tax rates if you have no intention of moving abroad permanently.
Richard Jacobs, director of Richard Jacobs Pension & Trustee Services, said: "More than half of the people asking me to take their pensions offshore into Qrops are not genuinely planning to move abroad long term."
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Transferring your pension can be attractive if the country you are moving to has a more generous tax regime than the UK.
For some jurisdictions this can mean benefits such as lower marginal tax rates, higher levels of tax-free cash, improved death benefits, no compulsion to buy an annuity and freedom to invest in residential property.
However, a more popular motive is to avoid death duties on pensions. Pension investors reaching the age of 75 must either buy an annuity or move into an alternatively secured pension (ASP), a form of income drawdown that restricts the amount of income you can take.
Tax on money that is left in an ASP on death stands at a punitive 82%.
Andy Bell, chief executive and actuary at AJ Bell, said: "The 82% tax was introduced in April 2007. After that, we saw the amount transferred to offshore Qrops plans increase by three-and-a-half times.
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"The government is losing about £1m every day to overseas pension schemes and if it cannot see the sense in bringing in immediate reform, we can only hope that the next one does."
The Conservative party has said it will remove the requirement to buy an annuity at 75 if it wins this year's general election.
Financial advisers are also warning against using Qrops as tax evasion schemes and say any companies making bold claims about "freeing" your pension should be treated with caution.
Not everyone moving abroad will benefit from transferring their pension offshore and specialist advice should be sought.
Popular destinations such as France and Spain levy similar amounts of tax as the UK, so benefits are limited. There are also pitfalls to watch out for - transfer into the French system and you will not be allowed to take your 25% tax-free lump sum.
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Cyprus, on the other hand, has an income tax rate of 5% for pensioners, while Dubai and Portugal also have more attractive rates than the UK.
Some pension investors are also avoiding the 82% tax on death benefits after the age of 75 by running down their pot through "unauthorised payments" of up to 25% of the fund value. The process is known as "accelerated pension withdrawal" and incurs a 55% tax charge at the time of the withdrawal.
HMRC rules allow you to withdraw 24.9% of your fund each year, subject to 55% tax, on top of the annual income drawdown allowance prescribed by the government actuary's department.
These withdrawals can be made at any time after reaching the age of 55 and are in addition to the one-off 25% tax-free cash lump sum allowance.
Running down pension funds in this way is only an option for those wealthy enough to have sufficient assets elsewhere to support them through retirement.
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Accelerated pension withdrawal has caused controversy among financial advisers, with some warning that those using it could attract increased attention from HMRC.
Jason Butler, chartered financial planner at Bloomsbury Financial Planning, said: "Anyone whose affairs are not standard can expect increased scrutiny from the Revenue if they adopt this approach. There are other ways of reducing your inheritance tax liability."
However, Robert Reid, director of Syndaxi Financial Planning, said: "Just because you trigger an 'unauthorised' payment does not mean it is unacceptable to the Revenue. You just have to look at whether overall, even after paying the 55% tax charge, it is worthwhile doing it."