Offsetting the cost of advice this way would benefit clients and advisers alike
One of the multiple barriers to better take-up of financial advice is that some people are unwilling or unable to meet the upfront cost. In response to this, the government has allowed people to take small chunks (three lots of £500) out of their defined contribution pension pot to pay towards advice, and has also allowed employers to provide more help with advice (again, up to £500) without it becoming a taxable benefit in kind.
That said, these concessions seem to have had relatively little impact and the amount of advice you could get for £500 could well be limited, especially for something as complex as advising on a potential defined benefit to DC transfer.
But there is one area with much more potential which has so far not been tried – people’s DB pension rights.
If people could offset the cost of transfer advice against their DB pension, this would enable workers to explore whether it is a good idea without needing to have thousands of pounds of ready cash. It could also help with the debate over contingent charging, in that advisers who prefer to charge a flat fee for transfer advice would still be able to serve those who did not have the money to meet the full cost of advice.
There are precedents for DB pension schemes to be able to make offsets against the accrued rights of members. One example is the “scheme pays” system, whereby the pension scheme meets the income tax bill of a member who has exceeded tax relief limits in return for a reduction in future pension rights.
Another is pension sharing on divorce, where a scheme member can have a pension “debit” set against their entitlement in order to fund a pension “credit” to their former spouse.
Clearly, both of these processes place an administrative burden on DB schemes which they might not welcome, but parliament has decided the potential benefit to scheme members of these provisions is more important. The same case could be made with regard to helping people to pay for advice.
Of course, enabling people to pay for transfer advice out of their DB pension rights does raise a number of issues.
Because of the administrative cost to the DB scheme, there would need to be some de minimis level of advice being paid for. It would not be proportionate for a scheme to haveto spend £500 in admin costs to allow a member to fund £500 worth of advice, for example.
At the other end of the scale, it is important such a facility is not abused and seen as something of a free lunch by high-charging advisers. Perhaps there could be a potential cap on the total amount which could be drawn down (some percentage of the cash equivalent transfer value, for example), and also some cap on the frequency with which the facility was used.
Another practical issue would be which pension rights to reduce in order to fund the advice cost.
For example, there could be a priority sequence whereby the cost was first debited against any additional voluntary contributions, or which did not allow residual benefits in the DB scheme to fall below the level of the guaranteed minimum pension.
But all of these are issues that have already been addressed for the purposes of “scheme pays” and they do not seem to have been a deal breaker to the implementation of that policy.
For the member, the big advantage is that the significant cost of holistic advice on a pension transfer could be absorbed relatively painlessly from a large DB pension entitlement. This could lead to more people seeking advice in order to decide if a transfer is right for them.
If workers had a legal right to offset their advice costs against their DB pension rights, scheme trustees might decide to avoid the costs of this by offering to directly fund advice for scheme members.
Some DB trustees have in the past been rather wary of paying for advice lest they be held responsible if workers act on it and suffer poor outcomes.
But in a world of pension freedoms there is a growing recognition among trustees that workers are going to need more advice, so a trustee that wants the best outcomes for members should seriously consider funding it.
If the threat of having to administer a DB debit to pay for advice nudged more trustees into directly funding it instead, this would be an entirely positive outcome.
Steve Webb is director of policy at Royal London