£500 of pension savings tax-free to fund advice The government is considering allowing people multiple uses of a £500 tax-free retirement advice allowance so they can seek advice at different points in their lives.
In a consultation out on 30 August, the government said it wanted people to be able to withdraw money from their pension pots to pay for regulated advice more than once but that each withdrawal would be limited to £500.
Recognising some would benefit from the measure more than others, it proposed limiting the amount of times consumers can access the tax-free cash.
It said: “The government is considering permitting savers to use the allowance more than once. This would allow people to take advice at different stages of retirement.
“There is a trade-off to be made. Allowing multiple uses of the allowance would give consumers the ability to take advice when their needs change. However, those who can afford to take financial advice regularly, or have an ongoing adviser relationship, could receive the benefit many more times than those who don’t.
“The government has identified an option that would allow people to get advice at different stages, but mitigate some of the potential issues. This would be limiting the total number of uses. The number of uses could be determined by identifying distinct ‘stages’ of retirement at which most people could benefit from repeat advice.”
The pensions advice allowance is part of the government’s aim to make retirement advice accessible to a wider range of people to help them make informed decisions at retirement. The idea was first mooted in the Financial Advice Market Review (FAMR) and later announced in the March Budget.
It followed government reforms in April last year, which gave all defined contribution savers unfettered access to their pension pots from age 55.
The government plans to free up tax-free funds in a newly created authorised payment for the purpose of financial advice on retirement only.
The allowance would sit outside the current 25% tax-free lump sum of a person’s retirement savings and would be paid by the pension scheme directly to the adviser, where possible through existing charging arrangements.
The facility would be made available for both face-to-face and robo-advice but would not be extended to defined benefit savers, according to current Treasury plans.
The government also wants to hear from the industry at what age people should be allowed to access the funds.
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.
“I look forward to the industry engaging with the pensions advice allowance consultation, and taking this opportunity to tell us how the allowance could best meet the needs of both consumers and firms.”
Systemic abuse
Providers welcomed the proposals but warned allowing people to use the facility multiple times could lead to fraud as well as abuse of the system.
Hargreaves Lansdown head of retirement policy Tom McPhail said: “There are various risks that will need to be guarded against, such as fraudsters targeting this new facility by pretending to be financial advisers, or investors splitting their pension into multiple small pots to strip all their money out in £500 tax-free chunks with the help of an adviser.”
And AJ Bell senior analyst Tom Selby added: “There is a significant risk that allowing people to use the tax-free allowance unlimited times would incentivise fraudsters to imitate regulated advisers in order to get their hands on savers’ hard-earned pension pots.
“Policymakers therefore need to think carefully about the risks associated with allowing multiple uses of the £500 advice allowance and how this will be monitored if someone has multiple pension schemes with different providers.”
The Treasury itself recognised the potential for fraud and said placing a limitation on the number of withdrawals that can be made would curb the risk. “If £500 could only be withdrawn a limited number of times, this type of scam would be less likely to take place,” it added.
Advice only
Under the proposed plans the allowance will only cover regulated advice and will not be extended to guidance. The government said this was to ensure it did not create an artificial £500 price point for non-advised services.
However, Aegon said policymakers should keep an open mind considering the changing nature of the market.
Aegon pensions director Steven Cameron said: “Another strand of the Financial Advice Market Review is to develop new forms of guidance. We would ask the Treasury to keep an open mind – perhaps allowing the pensions advice allowance to be used to cover new forms of guidance where offered by regulated firms.”
For his part, McPhail warned about the hidden cost in robo-advice services. “There may be complications with some robo-advice models, which charge relatively little for the advice but substantially more for the subsequent administration services,” he said.
The government wants to hear from the industry before 25 October.
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