Providers have admitted the introduction of a £500 allowance for pensions advice will not close the advice gap but argue it will help savers understand the value of advice.
Last week the Treasury published a consultation paper on allowing consumers to take £500 from their defined contribution scheme to pay for the cost of advice. It is one of the first proposals to be formally progressed from the Financial Advice Market Review.
Royal London pensions specialist Fiona Tait says: “People are expecting a lot of the advice allowance – it won’t solve the advice gap completely but it will help.
“Research we have done shows just seeing an adviser increases the chances that consumers will appreciate the service they are getting. A lot of people don’t even know what their pensions are worth. While £500 will by no means cover full advice costs, it will get consumers to start appreciating the value of advice overall.”
Hargreaves Lansdown head of retirement policy Tom McPhail says: “Certainly there are a lot of people who will feel that having the comfort of a regulated adviser telling them what to do is worth paying for.
“The problem we’ve always had is people are uncomfortable paying upfront cash sums in order to get high quality advice. The £500 is entry level, and combined with the further £500 allowance employers can give as a tax-free perk, that gets you a fair amount of advice. But we are still going to have a bit of a challenge in getting to people to pay for advice, even dipping into their pension pot at the £500 ceiling.”
McPhail adds: “It’s a good idea and it’s opening up advice, but it’s no quick fix solution.”
The Government has proposed the pensions advice allowance should go towards regulated advice only.
But Aegon pensions director Steven Cameron says the omission of guidance should be revisited as new advice models develop
He says: “At its heart, FAMR is about closing the advice gap. One of the hopes we have is it will come up with clarity between regulated advice and guidance, and that should create opportunities for advisers to come up with new models. If these do develop, it would be good for the Treasury to review at that point what the advice allowance can go towards.
“It is key for this to come from a regulated firm, but I don’t see why, in the spirit of closing the advice gap, the allowance couldn’t then be used towards other guidance models.”
The Treasury suggests the allowance should be available before age 55, and is consulting on what specific age it should be offered from.
Cameron suggests setting the allowance to kick in around age 40 would encourage people to engage with their pension savings earlier.
He says: “This isn’t just about making this facility available, it’s about nudging people to use the allowance.”
Intelligent Pensions head of pathways Andrew Pennie says: “There is an argument to say the earlier the better as there is a tendency for people not to engage with pensions until it is too late. Then again, our clients typically engage five years before retirement, so even 55 may be a bit optimistic as people may not be ready to make those kind of decisions.
“However it is good to see the Government sending a clear message this should apply to regulated advice only, as this is an acknowledgement that guidance isn’t working.”