Chief Treasury secretary Des Browne has warned potential self-invested-personal-pensions scheme providers that the government 'will not hesitate to act if there is evidence of abuse'.

He issued the caution following reports of proposals to encourage investment in holiday homes and other domestic property, which he insisted is 'unlikely to be an appropriate investment for most people'.

Browne insisted during a Treasury questions session in the Commons that: 'The limitations attached to such investment mean that is is unlikely, in our view, to have an appreciable effect on the housing market.'

He added: 'If we discover a loophole or identify distorting effects, we will take appropriate action.

'As to the policing of the SIPPs tax regime, Her Majesty's Revenue and Customs will ensure that the tax privileges granted to pension schemes are used for their attendant purpose and we will target compliance procedures accordingly.'

He strongly defended the pensions simplification package, claiming it provides benefits for all taxpayers, including those on lower incomes.

During exchanges Lib Dem MP Chris Huhne claimed an investor would normally need £1m in assets in order to put one residential property into a SIPP while maintaining a reasonable diversification of assets within his fund, and questioned whether government advice was adequate to prevent a pensions mis-selling scandal.

Labour MP Jim Cousins called for examination of the rules for attributing rent to properties in a SIPP and tax rules on debt, so that it would not be possible to use SIPPs to pass on to successors untaxed tax relief supporting large investments.

Plaid Cymru (Welsh Nationalist) MP Adam Price said the Revenue had already had to withdraw guidance on the personal use of holiday homes and admit it was wrong. He claimed the government had got into a muddle, which risked costing taxpayers billions of pounds and sending property prices soaring.