A lack of affordable, accessible and quality advice at retirement means we are on the cusp of a “mis-buying” scandal, likely to bite within the next five years.
According to research, an estimated half a million people retire each year without taking advice, and without government intervention these people will miss out on the help they need to get the most from their savings.
Since the pension freedoms were introduced, this issue has become even more important. Pensioners now have access to their entire pension pots all at once, whereas previously they were restricted to just a 25 per cent lump sum. With access to so much money, the benefits of seeking advice are obvious.
In an attempt to make financial advice more accessible, the Financial Advice Market Review (FAMR) has recommended allowing consumers to use some of their pension pot to cover the cost of pre-retirement advice. This is a positive step, as cost is one of the reasons people are put off taking advice and, coupled with access to affordable regulated advice, this should help the Government to start to bridge the advice gap.
However, allowing people access to their pension pot is something that needs to be carefully monitored and regulated. While the amount people might be able to take out to pay for advice has not yet been defined, without careful consideration there is a real risk that people may fall prey to pension scams.
Currently, some companies are claiming they can offer access to consumers’ pension pots before the age of 55. If people are legally allowed to access their pension pots to pay for advice, they may unwittingly be talked into parting with money unnecessarily. How much, and how regularly, people are able to take money from their pensions is something that will require close scrutiny, otherwise it risks undermining the benefits of paying for advice.
Yet, this is not the only way to help people make the most of their money in retirement, and there are other reforms in FAMR that we have welcomed and which should make advice more affordable.
Following the final FAMR proposals, the Chancellor has announced a £500 income tax and national insurance relief for employer-arranged pension advice, increasing from the current £150. This is something that was asked for by industry, and so it is good to see the Government listening.
The increase in the allowance will incentivise employers to pay for pension advice for employees, and it could feasibly cover the full amount of advice when lower-cost, online solutions are used. Employers play an important role in helping people save into a pension, and it is only right that they help people when they come to draw it.
One reform that was not in the FAMR report that we would have liked to see, was regulated advice vouchers. This is key, as it remains to be seen how many people will take up the offer to use their pension pots to pay for financial advice. Even with early access to their pensions, those who have relatively small pension pots may still be put off from seeking advice.