The Introduction of a Pension Advice Allowance
The Government is consulting on the introduction of a Pension Advice Allowance. If agreed, the allowance will grant pension savers the right to withdraw up to £500 tax free from their defined contribution pension up to 10 years early and redeem this against the cost of financial advice.
The raft of changes relating to pensions that have taken place in recent years has understandably created confusion among consumers. The introduction of pension freedom and auto-enrolment along with adjustments to the lifetime and annual allowance have of course increased the need for financial advice, but what has not yet been successfully implemented, is a financially viable way, for hard working, regular income individuals to accesses it.
The cost of delivering financial advice has more than doubled since the 1980s, this increase has largely been driven by the spiralling cost of regulation initially introduced to protect consumers from shady outfits and eliminate malpractice from the financial services sector altogether. Some firms were unable to survive in the new squeaky clean environment and the introduction of the retail distribution review (RDR) which saw a ban on product commission has made it near impossible for those that are left to find a commercially viable way to service individuals that are not able to pay the upfront fees now necessary to pay for financial advice.
Could the Government have finally come up with a solution to the problem?
With each Pensions Wise appointment costing the Government an average of £500 it’s understandable that the Pension Advice allowance could be seen as a good solution to stemming the perpetual drain on the funds the Government allocates to finding ways to plug the advice gap. So, when it comes to regular pensions, according to unbiased.co.uk this is what £500 will get you:
• Advice on an £80 a month pension contribution £500
• Advice on a £200 a month pension contribution £580
• Converting a £30,000 pension fund into a Lump sum and annuity £825
• Converting a £100,000 pension fund into a Lump sum and annuity £1,750
• At retirement advice on £100,000 pension Pot (client requires full advice) £2,000
These figures suggest that a £500 withdrawal will cover most, if not all, of the cost associated with providing advice on pension contributions only. However, it would only partially meet the cost of advice on accessing a pension pot.
With this in mind, it’s clear that the Pension Advice Allowance would be a step in the right direction for ensuring that the ordinary pension contribution advice needs of individuals are met and that advisers are paid appropriately for the provision of these services.
There does, however, need to be further consideration as to how the costs associated with advice on pension pot access further down the line can be met. Perhaps, at this point, the individuals in question, having reaped the financial rewards of pension contribution advice, will have a greater understanding of the significant benefits of financial advice and will be less resistant to paying for it in the first place.