There is a clear need to stimulate more people to seek regulated financial advice when planning for retirement. According to an Aegon survey carried out last year, only 14 per cent of people are confident to set their own retirement goals or know where to invest in order to meet these goals without financial advice.
At the same time, there appear to be clear benefits from getting sound retirement advice: Unbiased, the independent UK directory of advisers, found that those who sought retirement advice well ahead of retirement, increased retirement saving by an average of £98 per month as a direct result.
On 30 August HM Treasury (HMT) launched a consultation seeking the industry’s views on its proposed £500 tax-free Pensions Advice Allowance, which was initially signposted in the Financial Conduct Authority’s Financial Advice Market Review (FAMR), published just two days before George Osborne’s last budget, on 14 March 2016.
This Budget also declared that it would increase the tax exemption for employer-arranged pensions advice from £150 to £500, and remove the ‘cliff edge’ that meant that if an employer spent more than £150 on advice for each workplace pension participant, the whole amount became taxable.
The above was a response to two recommendations laid out in FAMR: the first was detailed in Recommendation 13, tasking HMT with “exploring ways to improve the £150 income tax and National Insurance exemption for employer-arranged advice on pensions” to encourage more advisers to take the plunge into retirement planning advice. The second, (Recommendation 14) asked the Treasury “to explore options to allow consumers to access a small part of their pension pot before the normal minimum pension age to redeem against the cost of pre-retirement advice”.
Therefore the new Pensions Advice Allowance is a direct response to the latter recommendation. It means that consumers will be able take the £500 and use it to access an automated retirement advice service that provides a personalised retirement plan or, more preferably, put the money towards regulated face-to-face financial advice. It cannot be put towards unregulated advice or guidance, the consultation states, as otherwise it would be difficult for providers (and by extension the FCA) to keep an eye out for fraudulent tapping of people’s pensions by advice scammers.
It is very welcome that the allowance is restricted to genuine advice and not conflated with guidance as happened in the 2014 Budget. This reinforces two of the key values of financial advice – it offers a personalised recommendation of the way forward and access to redress for the rare occasions when advice proves to be flawed.
The government proposes that the Pensions Advice Allowance should be made available before the age of 55 to enable individuals to plan for retirement well in advance. This consultation invites comments on the exact age from which the allowance should be available, so we will know that soon after this consultation closes on 31 October. The importance of early pension contributions suggests the allowance could be available up to 15 years before retirement, perhaps even earlier.