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Pension advice allowance could harm young savers

Pension advice allowance could harm young savers

Access to pension savings to pay for advice early on in life would mean that young savers miss out on the benefits of long term savings, industry experts have warned.

The Pensions advice allowance introduced earlier this month gives savers the option to withdraw £500 from their pension three times in their life during different tax years.

The new rule aims to help consumers get financial advice during different phases of their life, but some have warned that taking money out of a long term savings pot could do more harm than good, especially for younger savers.

Peter Glancy, head of industry development at Scottish Widows, said that while he welcomes the pension advice allowance, he warned that taking money out of a pension pot at a young age “has a much greater impact on your pension pot due to the compounding effect of the growth you lose out on”.

Mr Glancy added that advice is more valuable later on in life once the consumer has accumulated a larger pension pot to advise on, and that dipping into that fund too early could have detrimental effects.

“People generally benefit from advice after they have been building their savings over a number of years so we would certainly want to highlight to younger people the impact of taking money out of their pension in the early years,” Mr Glancy added.

AJ Bell’s head of platform technical Mike Morrison said that while the principle of trying to make financial advice more accessible is a “laudable aim”, the implications of how the advice allowance will work presents dilemmas and likely more suited to those nearing retirement.

“The allowance is really designed for people who have already built up some pension savings and need advice on their options as they approach retirement.  Younger savers who have started a pension might be better off focusing on saving as much as possible in their current scheme and holding the advice allowance back for when they really need it. 

“The allowance can only be used a maximum of three times and if someone has already started a pension, they have already made the most important decision.”

The advice allowance proposal has faced a number of complaints since its announcement.

UK pension providers warned that many of their customers would no be able to access the advice allowance with their current products, due to the complicated structure of existing policies.

Advisers have also voiced scepticism around the plan, as £500 would not likely be sufficient to provide any meaningful service.

However Jonothan McColgan, director and chartered financial planner at Combined Financial Strategies, said while reduction in yield caused by using pension funds to pay for financial advice could be detrimental to younger savers, in some circumstances could be worth the money.

“If a young person could benefit from financial advice and a small pension can be used to fund it instead of savings why shouldn’t they? After all they can use their savings for other purposes.