The treasury has published a consultation on creating a Pensions Advice Allowance, enabling people to take £500 tax-free from their defined contribution (DC) pension to redeem against the cost of getting regulated financial advice.
The consultation is a response to the Financial Advice Market Review, which recommended that the treasury should explore options to allow people to access a small part of their pension pot before age 55.
Now, the treasury proposes that the allowance be paid tax-free in addition to the normal 25% tax-free allowance. It proposes the new allowance would only be available for DC pensions and not final salary pensions, and only for advice services, not for guidance services.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: “This is good news for consumers, extending the ways in which they can access professional help as they approach retirement.”
Risks and complications
But he points out that 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.
The government has also flagged the age at which this facility should be available as an issue for consultation.
McPhail says: “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.”
He concludes that by permitting access earlier, for example from age 55, the government may succeed in driving a behavioural change towards earlier engagement with retirement options.
Andrew Pennie, head of pathways at Intelligent Pensions, adds: “Employers and large schemes are well placed to deliver and facilitate regulated advice for their members and at a cost well below £500.
“It doesn't necessarily need to be funded by the employer, but through their resource and scale, they can undoubtedly deliver better value than an individual member could source via their own means.”
This story was originally written for our sister magazine, Money Observer.