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ABI works out how to close gap with free advice

The ABI has been getting accolades this week for its proposal to reward small to medium-sized employers with tax breaks for providing access to financial advice for their staff.

The idea is that firms should get a financial break if employees get access to face-to-face advice from an IFA every two years.

The ABI says it would motivate more people to save for their retirement.

It believes that a £500m a year investment by the Government could reduce the savings gap by as much as £2bn a year.

IFAs point to the large numbers of lower-earners who have in the past relied almost exclusively on industrial-branch-style salesmen visiting them in their homes to satisfy their financial needs.

Now that the people from the Pru, Eagle Star and Britannic are no longer coming around because it is uneconomical, this group has been largely excluded from receiving financial advice.

Heartland Independent Advisers chief executive Tony Weaver says: “There is a huge percentage of the population receiving no financial advice at the moment. The workplace is an ideal site to provide cheap advice to large groups of people who may not be receiving it otherwise.”

The workplace advice tax credit comes as part of a three-step action plan put forward by the ABI to boost savings for retirement.

The two other steps are for a pension contribution tax credit, outlined two weeks ago, to encourage employers to contribute to pension schemes and reducing the vast majority of the regulatory costs associated with delivering advice.

The pension tax credit would see SME employers which contribute to employee pension schemes given a tax break to encourage them to continue doing so. The ABI believes this measure, which would cost the Exchequer £900m a year, would knock £2.8bn off the annual savings gap.

It has asked consultancy Oliver Wyman & Company to look at the costs of providing advice. It estimates that up to 80 per cent of these costs can be stripped away by tearing up parts of the rulebook.

For so-called safe-harbour products, the ABI believes advisers are too bogged down with compliance and procedure. Oliver Wyman says each product sale can take up to 12 hours – a situation it says cannot continue.

By abolishing the requirement for a suitability letter, allowing introducers to carry out more of the information-gathering tasks involved in selling products and scrapping the need for a second set of key features after the sale, Oliver Wyman says savings could be boosted by as much as £4bn to £5bn a year.

The ABI suggests that by combining the three proposals around £10bn could be slashed from the savings gap.

This would, of course, come at a cost and this is where the proposals may encounter some resistance from the powers that be. The pension tax credit and the workplace advice tax credit would jointly cost £1.4bn a year.

ABI head of pensions Joanne Segars says: “It is clear there is a widespread recognition of the need for workplace advice. The key, though, is making it happen. Our view is that many SME-type businesses will not make it happen without prompting.

“Saving for retirement is a partnership between individuals, employers, the financial services community and the Government. We think all parties have a responsibility to contribute and obviously there are costs involved.”

Treasury Financial Secretary Ruth Kelly is on record speaking on the merits of workplace advice, most recently when detailing the Government&#39s plans for annuity reform.

Aifa director general Paul Smee says: “I suspect that £500m may be too much. What I think we are now doing is not arguing over the principle anymore, we are arguing over the price tag.”

Syndaxi Financial Planning principal Robert Reid says: “If you want stakeholder to work, you are going to have to do something for the employer. But you have to make sure what you are doing will not make people say, &#39So what?&#39 and ignore it. If it is at all complicated, employers will not take it up.”

However, Sofa chairman John Porteous says: “Constructive ideas like this are always welcome but I think the savings gap is a lot more complicated than just incentivising advisers to get into the workplace. The undeniable truth is that many people simply cannot afford to save.”

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