Personal Pension 

Pension advice allowance will fail to deliver

  • Grasp how the new pension advice allowance will work.
  • Understand why pension freedoms increased the risk of savers running out of cash.
  • Learn what has been happening with defined benefit transfer values.
CPD
30min
Pension advice allowance will fail to deliver

The introduction of a pension advice allowance by HM Treasury was heralded by industry experts as an improvement on the existing system.

Given that the existing system doesn’t offer any tax-free cash for pension advice, this is essentially the industry damning by faint praise.

It was at the start of February that HM Treasury confirmed people planning their retirement will be able to withdraw up to £1,500 from their pension pots tax-free in order to pay for financial advice from April onwards.

Following an eight-week consultation, the economic secretary to HM Treasury, Simon Kirby, confirmed that the £500 allowance:

* can be used a total of three times, only once in a tax year, allowing people to access retirement advice at different stages of their lives, for example when first choosing a pension or just prior to retirement.

* will be available at any age, allowing people of all ages to engage with retirement planning.

* can be redeemed against the cost of regulated financial advice, including robo-advice as well as traditional face-to-face advice.

* will be available to holders of defined contribution pensions and hybrid pensions with a defined contribution element, but not defined benefit or final salary type schemes.

When unveiling the new way to pay for pension advice Mr Kirby stressed that pension providers will be able to offer the allowance to their members from April 2017.

He said: “Pensions and savings decisions are some of the most important a person will make during their lifetime.

“This allowance will help people get the vital financial help they need to plan for their retirement.”

But will the allowance really help people get the financial advice they so desperately need after former chancellor George Osborne delivered a wider array of choice with pension freedom?

The government announced pension freedom in the 2014 Budget to start in the 2015 to 2016 tax year. 

It means anyone aged 55 and over can take the whole amount as a lump sum, paying no tax on the first 25 per cent and the rest taxed as if it were a salary at their income tax rate.

Because pension freedoms meant greater choice it also has delivered greater risk of savers running out of cash in their retirement.

The Association of British Insurers’ statistics for the first complete year since the Freedom and Choice reforms, from April 2015 to April 2016, showed the majority of savers were taking a sensible approach, with 57 per cent pots with 1 per cent or less withdrawn during the last quarter. 

However, there were signs a minority may be withdrawing too much too soon and at rates that would see their money run out in a decade or less, if they are reliant on their pension pot as their main source of income. 

In the last quarter, 4 per cent of pots had 10 per cent or more withdrawn, and many others took their whole pot in one go. 

CPD
30min
  1. Who does Mr Hatchett say transferring out of defined benefit pension could be the right option for?

  2. What does Ms Audhlam-Gardiner say is the challenge with the new pension advice allowance?

  3. What is the average amount a 64-year-old cashing in a DB pension worth £10,000 a year would have received on 31 December 2016, according to Research by Xafinity?

  4. How much does face-to-face advice cost per hour on average, according to HM Treasury?

  5. How many savers in the first year of pension freedoms were taking a sensible approach, according to the Association of British Insurers?

  6. How many times can the £500 pension advice allowance be used?

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