April 6 saw the introduction of the pension advice allowance: a new type of tax-authorised payment to allow members of DC (or hybrid) schemes to take up to £500 from their pension pot to pay for financial advice.
Paying an allowance that is used for advice that is not fully regulated could be an unauthorised payment
The payment also won't be subject to income tax. Individuals can only take an allowance once in any tax year and a total of three times in their lifetime.
Fortunately, trustees and providers won't be expected to police this – instead, members taking an advice allowance will have to declare that they have not used the allowance more than twice already, or at all in the same tax year.
Pension schemes won't have to offer the allowance – trustees and sponsoring employers should decide whether they want to do this – preferably before they start getting queries from members.
Trustees who decide to offer the allowance, should check their scheme rules (and amend them if necessary), update their administration procedures and communicate the new option to members.
Members who take the allowance must declare that it will be used to pay for fully regulated advice.
This is an additional complication, as not all advice on occupational schemes is fully regulated and members are unlikely to know (without help) whether the advice they plan to take is fully regulated or not.
Technically, paying an allowance that is used for advice that is not fully regulated could be an unauthorised payment. To help avoid this, trustees may decide to require the financial adviser to confirm that the payment will be used for fully regulated advice – the adviser is in a much better position to know this than the member.
The pension advice allowance involves members paying for advice from their own DC pot and should not be confused with employer-arranged pension advice.
Currently, employers can pay £150 a year towards providing pension advice for an employee, free of income tax. This was to have been increased to £500, and the scope of what it could be used for was going to be extended.
However, the unexpected general election has resulted in some provisions being culled from the finance bill, including the provision allowing the extension of the employer-arranged pension advice allowance. We'll have to wait and see whether this is resurrected following the election on June 8.
Jill Clucas is PSL counsel at Hogan Lovells International
