Your IndustryApr 28 2016

New ways your clients can pay for pension advice

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
New ways your clients can pay for pension advice

Pension pot access could be granted up to 10 years before retirement in order to help people pay for advice, the Financial Advice Market Review final report suggested.

The final FAMR report highlighted research by adviser directory Unbiased in July 2015, which showed those consumers who had sought independent financial advice had increased their retirement savings by an average of £98 a month.

According to the FAMR final report: “FAMR recommends government explores options to give people access to a small part of their pension funds to pay for financial advice before normal retirement age.

“This nudge could take place five to 10 years before individuals reach their normal minimum pension age, currently 55, so the individual has enough time to plan for and, if necessary, step up their savings rate, ahead of retirement.”

While this is a good idea in principle, according to Chris Hannant, director general of the Association of Professional Financial Advisers, “it doesn’t address the fundamental challenge about lowering the cost of advice.”

Stephen Gazard, managing director at Bankhall, agrees: “There are caveats.

“The majority of consumers need financial products sold to them rather than making an unprompted, unsolicited decision to buy a financial product.

“This still fails to be understood. Customers often don’t see the need for financial advice, let alone have the means to pay for it.”

Former FSA head of retail investment policy, David Severn, adds if people do pay out of the pension pot, they may find this works against them.

This should encourage consumers to take financial advice early Elliott Silk

He says: “A consumer who cannot afford advice unless they raid the pension pot is unlikely to have much money in their pension pot.

“So withdrawing some funds early reduces what the fund can eventually buy by way of an annuity, for example.”

Phil Brown, head of policy for LV, agrees, adding: “Without careful consideration, there is a real risk people may fall prey to pension scams.

“How much, and how regularly, people can take money from their pensions is something that will require close scrutiny.”

As part of the Financial Advice Market Review, industry figures and the Financial Conduct Authority’s acting chief executive Tracey McDermott considered whether commission could be reinstated to make advice more affordable.

The report acknowledged calls for the return of commission from some sections of the industry but stated there was “no case to consider this. FAMR is not recommending a return to commission-based financial advice”.

It added many respondents had expressed concern over potential consumer detriment stemming from the use of commission on non-advised sales, such as the sale of annuities.

According to the FAMR final report, the Financial Conduct Authority’s October 2015 Consultation Paper CP 15/30, Pension Reforms – Proposed Changes to our Rules and Guidance, included a chapter on such commission payments.

The consultation closed on 4 January 2016 and the FCA is analysing the responses to the consultation.

It is expected the policy statement will be produced some time before summer.

However, it stated there was some flexibility in allowing for instalment-based payments to make financial advice more affordable and accessble for some consumers.

FAMR final report recommendation

The Financial Conduct Authority should take steps to help ensure firms and advisers are aware of the existing flexibility in the rules on adviser charging.

There are other practicalities to consider. A spokesman for consultancy AKG says: “If a customer is comfortable with the payment being made from their accumulated retirement fund, this could form a practical solution.

“This would need to be clearly articulated to the customer in terms of how it works, how much the fee is, from whom it is being paid and to whom, and what is covered by the fee.

“Also, providers must facilitate such payments from their product/scheme to the source providing the advice to the customer.”

Allowing tax breaks to be utilised to pay for pension advice was also recommended in the FAMR final report.

In the Financial Advice Market Review final report section on accessibility, three key ways for the government and regulatory bodies to help the industry enable some form of workplace-based financial support are outlined.

The three recommendations are:

The FCA and The Pensions Regulator should develop a factsheet to set out what help employers and trustees can provide on financial matters without being subject to regulation.

The Financial Advice Working Group should work with employers to develop a guide to the top 10 ways to support employee’s financial health

The government should explore ways to improve the existing £150 income tax and national insurance exemption for employer-arranged pension schemes.

“FAMR shows the workplace’s role in the UK’s financial education has moved out of the shadows into the light”, says Jeanette Makings, head of financial education at Close Brothers Asset Management.

She adds: “If the recommendations come into force, employers will have much greater clarity over what they can and can’t provide to employees within regulatory boundaries. Removing this confusion will encourage more to offer greater provision to their staff.

“Many employers do already provide comprehensive support for their employees, but the review will also help institute best practice among those that are not aware of their obligations or do not know what they should be providing their staff.”

Mark Stopard, head of product development for Partnership, expressed caution over the pre-retirement advice tax break of £150.

He says: “FAMR has suggested it should be ‘comparable to the tax exemption for employer-arranged pension’s advice’. We need this level (which has not been reviewed since 2004) to be increased to an amount that will allow for a holistic financial review and recommendations to be made.”

Laurence Baxter, head of policy and research at the Chartered Insurance Institute, says: “The pre-retirement advice tax break has the potential to be a useful way of engaging customers in paid-for advice or guidance services well ahead of retirement.

“The success of this recommendation will depend heavily on how its implemented.”

Four things to consider, according to the CII
1) How much advice would consumers be allowed to access this way and how much advice this would buy?
2) This probably won’t be seen as a potential commission, because it would still be an adviser charge, and rules implementing this would have to ensure maximum transparency.
3) There is a risk of potential “over-advice” or consumers with only basic needs targeted for advice services they do not need. But again, that is where guidance services, especially public financial guidance, could really come into its own because it could be the first port of call.
4) This tax break is only efficient in the current exempt-exempt-taxed pensions taxation system. Any subsequent shift in government policy towards a taxed-exempt-exempt system, such as moving Lifetime Isas into workplace pensions, would negate the benefit.

But Elliott Silk, head of employee benefits at Sanlam, believes this recommendation is a good idea.

He says: “Nearly one in five non-retirees in their 60s say they can’t afford a financial adviser, so it is pretty unequivocal that the cost of financial advice is a barrier for some.

“Thanks to the FAMR, a recommendation has been made to allow consumers to be been granted access to their pension pot early to pay for the cost of advice.

“This should encourage consumers to take financial advice early as planning ahead of the game is essential as retirement is not a one-off decision.”

Referring to research carried out in March 2016 by Sanlam, among 2,000 UK adults, Mr Silk says it is clear advice is needed as it was “alarming” 29 per cent of the UK’s non-retired over-60s polled were unaware of the pension freedoms, nearly a year after they came into force.