The UK government first suggested the proposal back in March during the annual budget, based on recommendations by the Treasury and Financial Conduct Authority’s (FCA) joint Financial Advice Market Review (FAMR).
FAMR found that there is an ‘advice gap’ for retirement advice for people without “significant wealth”, calling on the treasury to introduce a tax free stipend from pensions to make financial advice more affordable and easily accessible.
Pensions advice allowance
According to consultation paper published on Tuesday, the pensions advice allowance will come into force from April 2017 and will allow people below age 55 to take up to £500 out of their pension plans tax free to put towards the cost of financial advice.
The £500 would be for regulated advice only and the amount will be in addition to the 25% tax free lump sum which savers can currently withdraw once they reach the age of 55.
"The single best way of improving retirement outcomes is to increase the number of consumers who receive professional advice.”
At present, providers can withdraw money from a client’s investment product to pay a financial adviser for advice relating to a specific pension scheme or investment, however, the government allowance can be used for advice on all pension products a person holds.
The government said it intends that the pensions advice allowance should be withdrawn from defined contirbution pension pots only.
The sum can also be used for robo-advice or automated advice services, many of which currently cost around £500, said the treasury, face-to-face advice costs £150 per hour on average, and can take up to nine hours for advice on pensions.
The UK government hopes the measure will increase the number of people accessing financial advice after it found that less than a third of people get advice on their pension despite research by the professional services directory Unbiased showing that those who sought retirement advice increased their retirement savings by an average of £98 a month.
In addition, the treasury has confirmed that that the tax exemption for employer arranged advice, also at £500, could be used in conjunction with the pensions advice allowance, to give people access to up to £1,000 of tax advantaged financial advice
In March, the government announced in the budget that it would increase the tax exemption for employer arranged pensions advice from £150 to £500 by April next year to remove “a cliff edge” that meant that if an employer spent more than £150 on advice, the whole amount became taxable.
Risk of fraud
Insurer Aegon has welcomed the move but urged the government to “keep an open mind” and allow the money to be used to cover “new forms of guidance” by regulated firms.
“In today’s pension world, individuals have complete freedom over how to draw their pension benefits, but choosing what’s best can be daunting without access to advice,” said Steven Cameron, Aegon’s pensions director.
Tom McPhail, head of retirement policy at Hargreaves Lansdown said the allowance is “good news for consumers” but warned it may put them at risk from fraudsters pretending to be financial adviser.
“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.”
He added that there may be complications with some robo-advice models, which “charge relatively little for the advice but substantially more for the subsequent administration services”.