New pension advice allowances that permit savers up to £1,000 to pay for financial advice are at the heart of Treasury proposals published today in response to the Financial Advice Market Review.
The Treasury has published a consultation on improving access to retirement advice for pension investors that takes forward the Financial Conduct Authority’s recommendation that people should be allowed to access £500 from their pension pot tax-free before age 55 to pay for advice. FAMR also proposed the government extend the tax exemption for employer-arranged pensions advice, currently limited to £150 and which incurs a tax charge as soon as the value exceeds £150, to a new limit of £500. This means employees could potentially access up to £1,000 of retirement advice, without having to personally pay a fee from their own pocket.
The Treasury proposes that the pension advice allowance be paid tax-free and that it is in addition to the normal 25 per cent tax-free allowance.
It proposes the new allowance would only be available for DC pensions, not for DB arrangements, and only for advice services. Guidance services that stop short of a personal recommendation would not be eligible for the allowance.
AJ Bell senior analyst Tom Selby says: “One of the biggest challenges with the new proposals is how to monitor activity and prevent fraud. There is a significant risk, acknowledged by the Treasury, that allowing people to use the tax-free allowance unlimited times would incentivise fraudsters to imitate regulated advisers in order to get their hands on savers’ hard-earned pension pots.
“Policymakers therefore need to think carefully about the risks associated with allowing multiple uses of the £500 advice allowance and how this will be monitored if someone has multiple pension schemes with different providers. It’s vital the regime is carefully designed so it is robust, with controls in place to ensure the money is only used to pay for regulated financial advice.”
Hargreaves Lansdown head of retirement policy Tom McPhail says: “This is good news for consumers, extending the ways in which they can access professional help as they approach retirement. There are various risks that will need to be guarded against, such as fraudsters targeting this new facility by pretending to be financial advisers, or investors splitting their pension into multiple small pots to strip all their money out in £500 tax-free chunks with the help of an adviser. There may also be complications with some robo-advice models, which charge relatively little for the advice but substantially more for the subsequent administration services.
“The government has also flagged the age at which this facility should be available as an issue for consultation. This is important because the vast majority of investors only consider their retirement options within the last 2 years before they draw on their pension pots; for many it only happens a few months out. By permitting access earlier, for example from age 55, the government may succeed in driving a behavioural change towards earlier engagement with retirement options.”