The plans involve a relaxation of the rules over adviser charging to allow the £500 to fund ‘holistic advice’ on multiple pension pots and other savings products such as ISAs.
The proposal was first introduced in this year’s Budget in March and followed up on a recommendation by the Treasury and Financial Conduct Authority’s (FCA) joint Financial Advice Market Review (FAMR).
According to proposals published yesterday, the pensions advice allowance will come into force from April 2017 and will allow people below age 55 to take up to £500 out of their pension pots tax-free to put towards the cost of financial advice.
The Treasury quoted research which found only 22% of people approaching retirement know the value of their pension pot and only 14% of people would be confident planning their retirement goals without financial advice.
Economic Secretary to the Treasury, Simon Kirby, said: ‘Pensions and savings decisions are some of the most important a person will make during their lifetime. It is therefore vital that people can access the financial help they need and feel confident choosing the support that works for them in their retirement.’
The Treasury said the £500 could be used to help pay for face-to-face or be used on an online advice model that provides a personalised retirement plan.
The £500 would be for regulated advice only. Guidance services would be excluded. It said high quality guidance is already available for free or well under £500. Also, offering the allowance to unregulated persons ‘creates consumer protection risks’, it said.
The Treasury was keen to stress that the advantage of this measure would be that it would help people get advice on a range of assets and savings vehicles.
It said the allowance would go further than the current provision which only allows people to get advice on the pension pot from which the advice fee is taken.
Using the adviser charging system a provider can withdraw funds from a client’s investment product to pay a financial adviser for advice relating to that pension scheme or investment. However, it said, using this current method to pay for ‘holistic retirement advice’ on all of an individual’s pension products would be an unauthorised payment liable to a tax charge of at least 55%. The Treasury proposes a new ‘authorised payment for pensions’.
It said: ‘The government’s proposed design for the Pensions Advice Allowance… would allow adviser charging to be used for holistic retirement advice that considers all of an individual’s savings.’
The consultation cites the FAMR’s conclusion that automated advice services could increase affordable advice to the mass market.
The Treasury said a number of automated advice services currently cost around £500. It said the FCA’s Advice Unit will provide regulatory support to firms ‘to bring more affordable services to market’.
It said face-to-face advice costs £150 per hour on average, and can take up to nine hours for advice on pensions.
While the consultation proposals only allowing £500 to be accessed ‘per use’ it has asked for views on allowing multiple uses to fund advice throughout retirement.
It said allowing a limited number of uses would create a risk of fraud, with scammers imitating advisers to persuade people to withdraw the allowance multiple times from multiple pots.
The Treasury’s proposal is to limit the total number of uses. The number could be determined by identifying distinct stages of retirement.
Finally, the consultation leaves open for discussion whether the pensions advice allowance can be used for defined benefit (DB) pension transfers. Existing rules already allow charges to be taken out of the product for DB to DC transfers and all employer-funded advice is already exempt form income tax.
The full consultation can be read here.
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