The Treasury has opened a consultation on the introduction of a pensions advice allowance, which would allow members of defined contribution schemes to use up to £500 of their pot to pay for tax-free regulated financial advice.
Savers are currently allowed to exchange part of one pot for advice on that particular product, but fall foul of a 55 per cent tax charge if they use the money for holistic advice across their retirement provision.
Some experts raised concerns that scheme rules might block the changes, and have questioned public demand for advice.
The call for evidence, which closes on October 25, asks all stakeholders for opinions on the proposal, addressing a perceived advice gap for DC savers with lower wealth levels.
There are good reasons to expect that providers who do not already offer adviser charging won’t invest in additional administration functionality to offer the new authorised payment
Ian Neale, Aries Insight
The new measure would commence in 2017, alongside an increase of the tax exemption on employer-arranged financial advice to £500, allowing savers up to £1,000 of tax-free advice.
Martin Tilley, director of technical services at Dentons, welcomed the change, despite the fact people with the smallest pots are still likely to see £500 as expensive.
“People are beginning to engage with pensions, and if they can see that this is another tool that’s being put in place to assist them then we need to publicly get that out there, and that will hopefully force the demand up,” he said.
The consultation confirmed that the allowance will not apply to defined benefit schemes, but savers with both types of pension will be able to use money from their DC pot to access advice covering their DB pension.
Will it be used?
Chantal Thompson, pensions partner at law firm Baker & McKenzie, said facilitating the payments would not be onerous for schemes, since they already make ‘scheme pays’ transfers if a member has incurred an annual allowance charge.
But she added that where there are trust-based occupational schemes “there will be a need to think about whether the rules need to be amended to allow charges to be paid”.
The consultation concedes “a low level of demand” means some providers do not offer adviser-charging facilities, and that the introduction of the allowance may not change this.
Ian Neale, director at intelligence resource Aries Insight, said the government initiative means some individuals will be misled into thinking they have been given a statutory right when they have not.*
Companies that do not already offer it are unlikely to invest in adviser charging models, he added.
“There are good reasons to expect that providers who do not already offer adviser charging won’t invest in additional administration functionality to offer the new authorised payment, just as very few trust-based DC schemes offer drawdown.”
Entrenched savers’ habits mean they would be unlikely to pay for financial advice despite the tax break, Neale said, but added: “If the government thinks the need for advice is growing, they might reflect on why that is.
“We usually seek help in managing our affairs when we find something is too complicated to understand. That’s why we coined the word ‘complification’ to describe what has happened to pensions legislation since A-Day.”
*The wording of this paragraph has been revised since original publication to amend any inaccuracy
