Out-Law News 3 min. read

Pensions advice allowance must cover more than just pension products, says expert


The final design of a new tax-free allowance which pension savers will be able to withdraw from their pots to pay for financial advice must be able to accommodate more than just pension schemes and products, an expert has said.

Pensions and lifetime savings expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that this was down to the changes to the way in which people save towards their retirement, including the introduction of the new 'lifetime ISA' (LISA) next year "as well as a continuing trend towards retirement wealth coming from various sources".

The government is consulting on the design of the new allowance until 25 October. Barton said that the government would also have to consider whether to allow multiple uses of the allowance, as well as the age at which it should be made available; along with "thorny practical issues" such as how to ensure that any payment was not 'unauthorised' and worked within the current rules for facilitation of adviser charges.

"It seems logical, albeit perhaps not to the tax man, that the pensions advice allowance should be made available annually," he said. "This would allow pension members to get into good habits, take advice and plan for the future."

"Although a key part of the advice will be around retirement options, as the consultation itself notes those who take advice see the point of increasing their contributions. Unless the allowance is made available to all age groups, the chance to contribute more at an early stage may be missed," he said.

"At the same time, if the pensions advice allowance is effectively restricted to retirement decisions due to age constraints, then the decision itself may be limited by the amount of money in the pot. We need a system that helps people to contribute more and early enough to make a difference," he said.

The new allowance will be designed to allow "people nearing retirement" to withdraw up to £500 from a defined contribution (DC) pension pot, tax free, to put towards the cost of financial advice, according to the government's announcement. That advice could potentially cover "all the financial products that contribute towards [an individual's] retirement income, such as multiple pension pots and other assets like ISA savings", and could be delivered face to face or via automated advice models, the government said.

The allowance, which is due to be introduced next April, goes further than the current rules which only allow people to obtain financial advice on the pension pot from which the allowance is withdrawn with that money. Expanding the existing allowance in this way was one of the recommendations of the Financial Advice Market Review (FAMR), which suggested that this could help to address the 'advice gap' preventing people without significant wealth from accessing high quality retirement advice.

The government's intention is to restrict the use of the allowance to full, regulated advice, meaning that it could not be used to pay for guidance services. Its belief is that high quality guidance is available either for free or for "significantly less" than £500, including through the government-backed Pension Wise service. Extending the use of the allowance to unregulated advisers "creates consumer protection risks", according to the government.

The allowance would be limited to £500 per use, although the government is considering permitting savers to use it more than once. However, this would require a "trade-off", as it would risk creating "more opportunities for pension fraud" as well as allowing those who can afford to take financial advice regularly to benefit more often, according to the consultation. The £500 figure would cover the cost of "a number of automated advice services" currently on the market, or make a significant contribution towards the cost of face to face advice, it said.

"The Financial Conduct Authority's Advice Unit will provide regulatory support to firms to bring more affordable services to market," the government said in its consultation.

The government is also explicitly seeking views on any potential "administrative difficulties" that pension providers or advisory firms could face when offering the allowance for automated advice services.

An increased tax exemption for employer-arranged financial advice, announced at the 2016 Budget, is also due to be introduced next year. This change will be "complementary" to the pension advice allowance, potentially giving individuals access to £1,000 worth of tax advantaged financial advice, the government said.

"To guard against fraud and to help keep costs down, it may be that employers – and, maybe, trustees - make arrangements for an adviser to support a particular workplace scheme in relation to the pensions advice allowance, and the advice that can be paid for by the employer," pensions expert Tom Barton said.

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