As far as advisers are concerned, the direction of travel from the previous and current administrations is a good one.
Advice is now required when transferring from defined benefit to defined contribution schemes and from some pensions with guarantees. The tax advantage of employer-arranged advice is also set to increase from £150 to £500.
So the pensions advice allowance can be regarded as another step in this favourable trend. But just how useful is it?
Making £500 go far
Firstly, the allowance can be used to provide wider holistic advice, rather than just advice related to the product from which it is deducted. This makes sense because it is nigh on impossible to have a conversation about a pension without talking about the likes of standard and Lifetime Isas, alongside many other aspects of a client’s finances.
From the client’s perspective, £500-worth of advice costs a maximum of £400, given the tax relief received. This is clearly better than paying direct, where the cost would be £600 including VAT. So, it is certainly helpful.
But how much advice can £500 buy? In its consultation paper, the Treasury acknowledges that advice costs from £150 an hour and can take up to nine hours of an adviser’s time. In other words, a total cost of £1,350.
Fitting £1,350 of work into just £500-worth presents a significant challenge, particularly for traditional face-to-face advisers.
Those giving advice via the telephone or web-based video/telephony may be able to offer advice at a lower cost. Robo-advice (or, rather, hybrid advice), where the client factfinds online before meeting a real adviser, is another potentially lower-cost model.
However, the difficulty with both these solutions is there is some reliance on the client to have the stamina to answer many questions. There is an even greater reliance on the client answering those questions correctly or being able to understand the myriad financial paperwork collected over years.
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Will employers pay up?
The £500 allowance may have legs in the workplace if the employer is prepared to stump up some of the cost within their tax-exempt allowance. That would potentially allow up to £1,000 to pay for the cost of advice. Given the economies of meeting lots of employees at the same place and some commonality of current pension provision, this model could work.
The Government is also minded to allow the pensions advice allowance to be used on up to three different occasions spread over three tax years: so, three separate lots of £500.
However, each additional tranche of advice suffers from the same problems as the first, albeit a follow- up meeting should be quicker, given the facts and knowledge gained at the first.
The Government’s reasoning behind these three separate amounts appears to be fraud avoidance. But given the pensions advice allowance will only be paid by pension schemes and providers to authorised advisers, surely this risk is slim?
And the Financial Services Compensation Scheme is there to protect any small minority of cases where fraud does occur. With this in mind, surely the client should be able to choose how and when to use up to £1,500 of their pension fund to pay for advice? Whether that be all in one go and within one tax year if that is what suits.
The Government has already accepted that people can take £1,500 out of their pension to pay for advice without an unauthorised payment charge arising. There may be a small Exchequer cost to allowing it all in one fiscal year, rather than spread over three. But in the context of the overall Government budget, this amounts to a small rounding error.
Could the Government be persuaded to make this small change? Given the favourable wind towards advisers over the last three years, it should be a distinct possibility.
John Lawson is head of financial research at Aviva