The Treasury has tripled the pensions advice allowance to £1,500, allowing people to take part of their defined contribution pots early to put towards retirement advice, but some experts say limiting withdrawals to £500 per tax year is still too restrictive.
Last year the government announced that it would be consulting on the introduction of a pensions advice allowance, which would enable people to take £500 tax free from their defined contribution pot to pay for pensions advice.
On Friday, the Treasury announced that it is tripling this amount, so that from April 2017 savers planning for their retirement will be allowed to withdraw up to £1,500 from their DC pensions to put towards advice.
We’ve got a culture in the UK at the moment where the public is incredibly resistant to paying for financial advice, and whilst £500 isn’t going to buy much, it's more than nothing at all
Tim Middleton, PMI
While holders of DC and hybrid pensions will be able to access the allowance, it will not be available to people with defined benefit pensions.
Simon Kirby, economic secretary to the Treasury, said the money will be available at any age and can be redeemed not only against traditional face-to-face financial advice, but also robo-advice.
However, rather than being able to take out the total amount in one go, people will only be able to withdraw £500 in one tax year on up to three occasions.
An unnecessary restriction
Malcolm McLean, senior consultant at Barnett Waddingham, said he was pleased that the amount has been tripled, but also concerned about the restrictive nature of limiting the allowance to £500 per tax year.
“I don’t see why they have to be so prescriptive about how people can use it… [£500] is not going to get them, for example, a full financial review face-to-face,” he said.
“They ought to think again about it,” he added, noting that the Treasury might be focusing on ensuring that people do not abuse the allowance and overlooking what consumers need.
The prescriptiveness of the new allowance goes against the spirit of freedom and choice, McLean suggested, which is “all about letting people decide for themselves [in terms of] what they do with their own money – and this is their own money we’re talking about”.
And although robo-advice is generally a less expensive option, McLean highlighted the fact that it “hasn’t really got off the ground” yet.
He pointed out the difference between face-to-face and robo-advice saying the latter was essentially an algorithm.
"It’s not advice, it’s guidance essentially [and] doesn’t really compare with a full-scale financial advice interview… with accountability on the part of the adviser if they’ve mislead the individual in some way,” McLean said.
Constructive and beneficial
But Tim Middleton, technical consultant at the Pensions Management Institute, said he did not think it was unreasonable to limit the allowance to £500 per tax year given the size of the average DC pot at the moment.
“We’ve got a culture in the UK at the moment where the public is incredibly resistant to paying for financial advice, and whilst £500 isn’t going to buy much, certainly in terms of bespoke face-to-face advice, it's... more than nothing at all,” Middleton said.
“I also like the idea that people can access this information on three separate occasions,” he added.
“If you think about the whole accumulation journey with a DC pension scheme… allowing [people] to get advice at different points in their lives is a very constructive, beneficial thing to do.”
The value of retirement advice
Richard Freeman, chief distribution officer at Old Mutual Wealth, said the pensions advice allowance is a positive step that also shows the government recognises the value of taking advice at different life stages.
Scheme rules may block Treasury's advice allowance plans
Last August the Treasury 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.
But even so, he said a saver could use two of their three advice allowance portions together if they were used in early April.
“£500 is still a significant contribution towards financial advice and, given it spans tax years, £1,000 could actually be used in one go if taking advice over tax-year end,” he said.
Freeman added that to allay concerns from those who argue £500 could deplete small pension pots, the government will maintain providers’ existing ability to call out ‘reasonability’ requirements on withdrawals.
“Providers would be able to prevent a withdrawal that clearly represented poor value for money and would significantly deplete the individual’s fund,” he said.
