The Treasury has upped the amount savers will be able to draw from their pensions to pay for financial advice from £500 to £1,500.
In August, the Government set out plans for a £500 “pensions advice allowance” on the back of the Financial Advice Market Review’s recommendation that consumers should be able to access a small part of their pension pot ahead of minimum retirement age to offset the cost of pre-retirement advice.
After consultation, the Government has now opted for a £1,500 limit, to be accessed in £500 blocks on up to three occasions.
The Treasury says: “Whilst the Government acknowledges respondents’ concerns that £500 is not likely to be sufficient to cover the costs of a full, face to face holistic retirement advice process, it would be counterproductive to adopt a higher limit for the pensions advice allowance which may discourage advice providers from offering their services for less than £500.”
Breaking down the detail
The allowance will being from April 2017, but can only be used once in a tax year.
There will be no age restrictions, and consumers will be able to use to allowance to pay for robo-advice as well as face-to-face services.
The allowance will not be available to defined benefit pension holders but can be accessed by those in hybrid schemes as long as they have a defined contribution element.
Economic secretary to the Treasury Simon Kirby says: “Pensions and savings decisions are some of the most important a person will make during their lifetime.
“This allowance will help people get the vital financial help they need to plan for their retirement.”
“Retirement advice” has been given a deliberately wide meaning by the government, so the allowance will be available for advice on care funding and equity release.
The Treasury says: “The scope of the allowance reflects the fact that it is not possible to make decisions about pensions in isolation from other aspects of an individual’s finances.”
However, advice that is not “strictly related to retirement,” for example advice on inheritance tax planning, will not be covered.
Advisers will be allowed to carry on charging the client after their allowance has run out, for example if it was used to get advice to switch pension funds and then this was carried out after.
A welcome change
LV= director of advice strategy David Stevens said the Government had made a positive step by allowing the £500 tranches to be redeemed against the cost of robo-advice.
He says: “The Government is absolutely right to allow people to access money from their pension pot to pay for advice and it’s positive this reform covers both traditional and robo-advice to meet consumers’ changing habits.
“We know that the upfront cost of advice can be a major barrier for consumers and today’s announcement should ensure that more people can get the help and support they need. Professional financial advice is vital for retirement planning to help people make the right decisions for them and ensure consumers get the most from their hard-earned savings.”
A three-week technical consultation now begins before draft regulations are introduced.
The Treasury’s consultation response confirms the mechanism by which the allowance will be facilitated, that once the customer asks for it “the provider reduces the value of the client’s pension fund by the amount of the advice fee, and transfers these funds directly to that client’s adviser.”
The allowance can also be used in conjunction with a new £500 tax exemption for employer arranged pensions advice that was also recommended by the FAMR and coming in to force in April.
While the Government is encouraging providers and trustees to highlight the allowance to members, this will not be a mandatory requirement.
Pension Wise sessions will also reference the allowance “where appropriate”, the Government said.