The pensions advice allowance allows people to use their pension savings to get regulated financial advice. But is it delivering for those it was designed to help? And are ideas for reform focussing on the right things?
Unveiled in the 2016 Budget, people can use up to £500 in three different tax years to help them plan for their retirement.
What was, and indeed still is, a nice idea has hardly been earth shattering in its impact and it is fair to say that it has not moved the dial when it comes to providing assistance to people looking to plan their pensions and their futures. Not all providers offer it and it is hardly signposted, so is it not surprising that its impact has been marginal?
These themes came through strongly in the second Work and Pensions Committee report into the pension freedoms, with the committee supporting the broad policy intent, but questioning its execution. Ultimately the committee concluded that the advice allowance was ripe for review, highlighting key questions around the limits, uprating and signposting.
When people talk about how to improve the allowance, focus is often on whether £500 is enough. It almost certainly is not for full-fat financial advice, but is that what people need? Is focusing on the amount, indeed focusing on advice, the wrong question?
It is well-documented that we have a huge advice/guidance gap. The Pension Wise service is there to provide basic and generic help and is well regarded, but getting people to use it is another story and although initiatives like stronger nudge might help, we remain concerned that not enough people are getting the help and support they need through this service.
But even for the ones that are using Pension Wise, is it enough?
Rethinking the allowance
People need help to plan their retirements, probably more than Pension Wise can offer, but arguably less than full-fat financial advice. They need coaching and assistance, help and support to guide them through the complex web of decisions that could make a massive difference to their retirement outcomes.
So should we be rethinking the advice allowance from first principles to understand what it is really trying to achieve?
The advice market works effectively for those that can afford it and have more complex financial affairs. But there is a huge gap – remember the squeezed middle? – and initiatives like the pensions advice allowance should be specifically tailored and targeted to meet these needs.
So, why does the allowance have to be used for regulated advice? There are no doubt Financial Conduct Authority perimeter and compliance issues to consider, but I would argue that this is too narrow. What do people need? They need coaching and guidance and I’d like to see any review seriously consider what the allowance could be used for, starting where that help and support is best and where the gaps in help and support are.
So while reform of the advice allowance is much needed and we welcome the recommendations of the WPC, we need to go much wider and think through, from first principles, what support people actually need.