People will soon be able to take up to £500 out of their pension pots tax-free, as long as they spend it on financial advice. The government this week unveiled details of the “pensions advice allowance” that will be available to millions of people well in advance of their retirement.
It is possible that people as young as 45 could be eligible for the scheme, which will be in addition to the normal 25% tax-free lump sum you can take out of your pot from age 55. We look at what is proposed and what sort of advice £500 can buy.
What’s happening?
An individual will be able to withdraw the money and use it to pay for advice on all the financial products they hold that will contribute towards their retirement income, such as pensions and any other savings and investments such as Isas. This proposal was unveiled in the March budget, and on Tuesday ministers announced how they think it should work. The government says: “Individuals using the pensions advice allowance would still be entitled to the same tax-free lump sum as at present when they ultimately come to take their pension benefits.”
Who’s eligible?
It’s almost certain that only those with a defined contribution (aka money purchase) pension will be able to access the new allowance. However, if you are one of many people who has had several different jobs over the years and has both defined contribution and defined benefit pensions, you will be able to use the allowance to pay for advice on all of your pension assets. Defined benefit pensions include final salary and so-called career average schemes.
Some of the crucial details have yet to be decided - for example, how old you will have to be to take advantage of the allowance. A public consultation has been launched and will run until late October. At the moment ministers are only saying the allowance will be available before the age of 55 to encourage people to engage with their retirement planning early.
When is this coming in?
It will take effect from April 2017.
How will it work?
You will be able to use the cash to pay for any type of fully regulated financial advice – ie, personalised advice that may well include specific recommendations about products. This advice might be face-to-face, online or over the phone. Services that only provide general guidance will be excluded, and the adviser you use must be authorised and regulated by the Financial Conduct Authority.
One downside is that pension providers will not be required by law to offer this facility. They will be encouraged to, but won’t have to.
How will I access the cash?
To meet the rules, the money will need to be paid direct from the pension scheme/provider to the financial adviser. Tom McPhail, head of retirement policy at investment and pension firm Hargreaves Lansdown, says an individual would be able to instruct their pension provider that they had engaged a particular adviser, and would authorise the provider to make a payment to the adviser.
So if Mr Smith has a pension pot of £40,000 and decides to take £500 of advice, then that’s the amount withdrawn from his fund. There would be no tax deducted – his pot would simply be reduced to £39,500.
The main incentive for an individual is that they are, in effect, getting advice tax-free, so for a basic rate taxpayer it’s effectively cost them £400, while for those on a higher rate, the cost is just £300. This money could also be used as a contribution towards advice that costs more than £500.
Do I just get one allowance?
The government is considering letting people use the allowance more than once. That means you could use it to help pay for more advice if your circumstances change a few years down the line.
What sort of advice can I get for £500?
According to the government, face-to-face financial advice costs £150 per hour on average, and that for pension/retirement planning, you might be looking at up to nine hours, which would add up to £1,350. But people whose affairs are simple won’t need that long, and some will be happy to go with an online or phone-based service, which will probably be cheaper.
McPhail says that when it comes to face-to-face advice, “£500 is probably at the lower end of any advisory transaction. Most advisers will not engage for much less than that, simply because of the fixed costs involved in taking on a new client.”
For example, Hargreaves Lansdown’s minimum charge for a retirement consultation is £495 plus VAT. For that, you get a consultation with an adviser – which might be over the phone – and a report containing recommendations. But, given that £495 is the minimum, that assumes the individual’s needs are very straightforward and can be dealt with fairly quickly and easily. People with complicated affairs might be looking at spending several thousand pounds – but if that secures a much better income in retirement, that might represent excellent value for them.
Are there cheaper services?
The leading mutual LV= (Liverpool Victoria) has an online service called Retirement Wizard which provides fully regulated advice. It says people approaching retirement are able to get a personalised retirement advice report for £199, with recommendations on the specific financial products they should buy, and phone support if necessary. However, you have to be within three months of wanting to access your pension and have a maximum pot of £150,000. For an additional £499, LV= will make all the arrangements and set up your retirement plan.
What about free advice?
The government’s free Pension Wise service might be able to help if you are 50 or over and have a defined contribution pension. It provides “guidance” –not regulated financial advice – face-to-face, over the phone and online. It’s a 45-minute chat that will help you understand the information you need to make a decision, but it won’t tell you what to do. For example, it won’t recommend any financial products or providers.
Fifty local Citizens Advice delivery centres provide face-to-face Pension Wise appointments at 500 locations across England and Wales, while the Pensions Advisory Service runs the phone-based sessions. To find out more go to Pensionwise.gov.uk
Why should I seek advice?
Professional adviser search website Unbiased claims that people who take advice save on average £98 more every month and receive an additional income of £3,654 every year of their retirement, based on a pot of £100,000.
