Government consults on pensions advice allowance

Pension pot

The government has launched a consultation on whether defined contribution (DC) pension members should be able to access their retirement funds early to pay for financial advice.

The consultation, which will run for eight weeks until 25 October 2016, focuses recommendations by the Financial Advice Market Review (FAMR), announced in the March 2016 Budget, which proposed the creation of a Pensions Advice Allowance. This would enable individuals to take £500 tax free from their DC pension to redeem against the cost of pre-retirement financial advice.

The tax-free amount would be in addition to the tax-free lump sum that becomes available when benefits are ultimately taken.

The Pension Advice Allowance, which would be aimed at making financial advice more accessible and affordable, would be available for those under the age of 55. It would not be mandatory for pension providers to offer.

The FAMR also suggested further tax changes to improve the current exemption for employer-arranged advice, with the government also exploring whether the proposed Pension Advice Allowance could be used in conjunction with a tax exemption for employer-arranged advice, potentially giving employees access to up to £1,000 of financial advice.

These proposals would be expected to come into force from April 2017.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “This is good news for consumers, extending the ways in which they can access professional help as they approach retirement.

“There are various risks which will need to be guarded against, such as fraudsters targeting this new facility by pretending to be financial advisers, or investors splitting their pension into multiple small pots to strip all their money out in £500 tax-free chunks with the help of an adviser.

“There may also be complications with some robo-advice models, which charge relatively little for the advice but substantially more for the subsequent administration services.

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“The government has also flagged the age at which this facility should be available as an issue for consultation. This is important because the vast majority of investors only consider their retirement options within the last two years before they draw on their pension pots; for many it only happens a few months out.

“By permitting access earlier, for example from age 55, the government may succeed in driving a behavioural change towards earlier engagement with retirement options.”