Advisers have questioned whether the government’s £500 proposed advice allowance would pay for a comprehensive look at people’s pensions - and whether there would be demand for it.
In the final report of the Financial Advice Market Review the Financial Conduct Authority and HM Treasury said they would consult on giving people the option to take £500 from their pension savings to pay for advice.
No details were given in the FAMR report about how the £500 figure had been arrived at. A spokesperson for the FCA said it was a matter for the Treasury. A Treasury spokesman said the policy was going out for consultation soon, though no date has been set.
But some advisers have questioned whether £500 will be enough to pay for what could be complex pension advice - especially from IFAs required to investigate the whole market.
Data from Unbiased suggested £500 would not cover even the fairly simple job of converting a £30,000 pension pot into a lump sum and annuity - which the directory found cost £825 on average.
Jonothan McColgan, of Bath-based Combined Financial Strategies, said the FAMR did not address the major issues about why advisers are not interested in taking on smaller clients.
“The allowance is not going to cover the cost of a recommendation or transfer of your pension, but I’m not sure that’s what it is designed for,” he said.
“You would have to offer them advice which is restricted in some way, maybe just looking at what the best investment strategy is and how much they should be putting in.”
Colin Thompson, a financial adviser with Hertfordshire-based Provisio Wealth Management, said cost depended on the complexity of the situation, but his fee for arranging something and setting up any transfers is more like £750.
“If it encourages people to have advice they wouldn’t otherwise have then it is a good thing - whether they should take it out of their pension fund is debatable - it is someone with a pension pot of only £20,000 maybe they shouldn’t.”
According to Unbiased’s survey of 230 advisers last year, the typical cost of an initial review with a financial adviser is £500 but other elements of retirement planning can prove more expensive.
Converting a £30,000 pension fund into a lump sum and annuity was the cheapest aspect of at retirement financial planning, it found.
Karen Barrett, chief executive of Unbiased, admitted the £500 allowance would probably not pay for all the advice someone might need.
She said: “It’s true some will need to meet the rest of the cost from their own savings.
“But it should be remembered getting advice on your pension isn’t just a formality – you take it on the understanding it will leave you financially better off.
However Matthew Harris, director of Edinburgh-based Harris IFA, said £500 could pay for sufficient pension advice for simple needs, and suggested unneccesarily expensive advice is a “big blockage” in the system.
“Most advisers can probably build a profitable business on a lot less than £150 or £200 an hour,” he said.
Other advisers were more positive about the usefulness of the allowance, however, saying people with simpler pensions will benefit most.
Simon Webster, managing director of Kent-based Facts & Figures Chartered Financial Planners, said: “Five hundred pounds would pay for a couple of hours of my time. If someone has only got £50,000 in their pot there is not an awful lot you can do with it.
“It is about reassuring them they are going in the right direction and making sure they will not beggar themselves - they will not require a comprehensive financial plan.”
Mr Webster also questioned whether the proposal would lead to a significant increase in the amount of business advisers do.
He said: “In truth I don’t see it happening. After the initial rush the pension freedoms, which were far more significant, have become background noise now - we are only getting one a week.”
| Advice scenario | Typical cost (based on survey of 230 advisers in July 2015) | |
| General | Initial financial review/report | £500 |
| At retirement | Converting a £30,000 pension fund into a lump sum and annuity | £825 |
| Converting a £100,000 pension fund into a lump sum and annuity | £1,750 | |
| At retirement advice on £100,000 pension pot (client requires full advice) | £2,000 | |
| At retirement advice on £100,000 pension pot (client knows what they wish to do) | £1,000 | |
| At retirement advice on £200,000 pension pot (client requires full advice) | £2,500 | |
| At retirement advice on £200,000 pension pot (client knows what they wish to do) | £1,100 | |
| Set up of a drawdown scheme on a £300,000 pension pot | £3,500 | |
| At retirement advice where the client has a £200,000 Sipp, some DB income, £100,000 of investments and a £250,000 investment property, incorporating estate planning | £5,000 |
When asked what expectations the Treasury had about what £500 could buy people, a spokesman said the policy was going out for consultation soon.
She said: “The government wants to help people understand their pensions so they can plan for a comfortable retirement.
“That’s why we announced at Budget that we would be increasing the tax exemption for employer arranged-pension advice from £150 to £500, making advice more affordable, and consulting over the summer on introducing the Pensions Advice Allowance, which would allow people to withdraw £500 tax free from their defined contribution pension pot before the age of 55 for financial advice.
“We are also bringing together industry and consumer groups to create a unified pensions dashboard that will let people view all their retirement’s savings in one place.”
Ms Barrett added: “The definition of good financial advice is that it should more than pay for itself over the longer term. In light of that, it’s not the size of the allowance that matters, but the fact that it’s being proposed at all.”
