Personal PensionAug 31 2016

Treasury reveals £500 advice issue for guaranteed pensions

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Treasury reveals £500 advice issue for guaranteed pensions

A methodology to decide the advice allowance on guaranteed income pensions is under consultation, as part of the pensions advice allowance consultation published by HM Treasury.

The consultation, which was released yesterday (30 August), shows HM Treasury has admitted some savers may not be able to use its proposed £500 pension advice allowance.

In the document, the government has also said it is administratively difficult to determine what an appropriate reduction to the client’s benefits in exchange for £500 would be, given the complexities of guaranteed pensions.

Guaranteed products could include retirement annuity contracts with a minimum income guarantee or Section 32 contracts with guaranteed minimum benefits.

According to the government, for these products, withdrawing the funds to pay the adviser charge is “not straightforward”.

This is due to the fact that withdrawing £500 from the pension fund would not necessarily decrease the value of the benefits the individual eventually receives by £500, so the individual would receive the advice, but would not forego the £500 from his or her pot.

As such, there would be no reduction to the underlying value of the future benefits, meaning the pension provider would have subsidised the cost of advice which is against Financial Conduct Authority regulation.

However, the FCA allows firms to reduce part of the client’s rights under the retail investment product to pay the adviser charge, meaning there is no FCA barrier to firms offering the allowance for products with guaranteed features.

This means a firm could pay the adviser £500, as long as the firm can then subsequently reduce the underlying value of the individual’s benefits when he or she takes them later accordingly.

The consultation is asking questions on what the appropriate reduction level to client benefits would be, in exchange for the £500 of advice.

Elsewhere, the document made clear the intention of the government to use the advice allowance to pay for automated as well as face to face advice.

The consultation asks questions on any administrative difficulties pension providers or advisory firms may face on offering the allowance for automated advice services.

Richard Ross, director of Norfolk-based Chadwicks said: “Why not simply give tax relief on up to £500 worth of advice on pensions?”

ruth.gillbe@ft.com