After eight weeks of consultation, the Treasury last week decreed that three amounts of £500 can be taken from a pension fund throughout a lifetime to pay for regulated financial advice.
The pension advice allowance can only be used by “defined contribution pensions and hybrid pensions with a defined contribution element, not defined benefit or final salary type schemes”.
Hybrid pension schemes are complex, as you must know about the DB and DC elements of them before any advice is provided. Those with considerable DB benefits in a hybrid scheme can use the pension advice allowance, but it will need to be taken from the possibly small DC element.
It is a shame DB scheme members cannot benefit from the allowance, never mind from the pension freedoms.
Advisers will need to check previous advice sessions – face-to-face or not – to ensure the maximum allowance has not already been redeemed or they could put their client at risk of an unauthorised payment charge.
With the advent of robo-advice, there is a risk people could lose track of whether they have used their three allowances. After all, the majority of pension holders do not even know what funds they are invested in or the charges they pay.
Meanwhile, it is a shame the good guidance services like The Pensions Advisory Service cannot benefit from the allowance, with their services remaining free. Any marketer will tell you that things are valued more when there is a value attached.
I would like to see a national panel of advisers of all different sizes and charging bases to be consulted by those that set policy. Why? Because advice firms in the main are self-owned SMEs, which do not have the luxury of time to prepare detailed responses to wider industry consultations. Less than a handful of advisers responded on the pension advice allowance introduction.
But it is advisers that need to undertake all the procedural checks and administration to make this new initiative work. Will good advisers actively offer this to their clients? I think not. The compound interest effect of taking £1,500 out of pension fund could be considerably damaging to the final value at retirement.
Also, the administration of this allowance could eat up a big part of each £500 segment, simply by needing to contact those providers that are slow at responding. Advice needs to be provided for the instruction in terms of which fund is to be cashed in to secure the money, and then a record created to last a lifetime.
So, do I think the allowance is a good idea? Yes, I do. But many good advisers simply will not partake in it. Please, policymakers, listen to advisers. Only they know whether initiatives like this will be offered or not.
Kim North is managing director at Technology & Technical