The government says you will be able to take out £500 from your pension before you retire, tax free, as long as you use the money for advice on what to do with your pensions and retirement savings. How will it work?
Q. Why is the Pensions Advice Allowance being introduced?
A. Research from an organisation called Unbiased, which promotes independent financial advice, has found that those who took financial advice about their pensions and retirement increased their retirement savings by an average of £98 a month. But research shows that fewer than a third of people took financial advice about their pension. Many people think that financial advice is unaffordable or ‘not for people like them’.
My view is that since the changes to the way financial advice is paid for were introduced, an increasing number of financial advisers will only give you advice if you have a lot of money to invest. That is changing with the arrival of online-based financial advice services (sometimes called robo-advice). However it’s put many people off taking advice.
Q. How will the Pensions Advice Allowance work?
A. The idea is that you’d be able to use up to £500 from pension before you reach the age of 55, tax free, if you use it to pay for advice about your pensions. The money would be paid directly from your pension provider to your financial adviser. You may be able to use this £500 allowance more than once before you retire.
Currently you can ask your pensions provider to take money out of the premiums you’re paying into your pension fund to pay for advice if it’s paid directly to a financial adviser and if it’s for advice about that pension. However, if it’s for advice about other pensions than the one you’ve taken the money out of, this would be classed as an unauthorised withdrawal and it means that you’d have to pay tax of at least 55% on the money you withdraw.
SAVVY TIP: Under the current system, you can take money out of your pension once you reach 55, to pay for pensions advice (or anything else) and the first 25% would be tax free. However, this is too late to use it to pay for retirement advice because – by taking money out of your pension – you may have limited the options available to you.
Under the plans for the pensions allowance, you’d be able to ask your pension provider to pay £500 direct to your financial adviser for retirement advice about all your pensions, and you wouldn’t have to pay tax on the money that was taken out of your pension.
SAVVY TIP: The government has not yet decided at what age it will let people make use of the pensions advice allowance.
Q. What would I be able to spend the Pensions Advice Allowance on?
A. You’d be able to use the £500 for financial advice about your any or all of your pensions and retirement. As long as the advice was regulated (namely, provided by someone who’s regulated to give financial advice) there wouldn’t be any further restrictions on who you get the advice from. However, you wouldn’t be able to use the £500 allowance for ‘guidance’ about your pension – only for financial advice. The government’s plans would mean you’d be able to use your £500 allowance on digital and robo-advice.
Q. Would all pension providers have to offer this option?
A. No, under the government’s current plans, pension providers would not have to offer the option of letting you take £500 out of your pension to pay for financial advice.
Q. How is this different from paying for financial advice from your pension premiums?
A. Under the current rules, you have to pay for financial advice. You can do this by handing over a cheque (or, more likely, paying by direct transfer or mobile banking) to the financial adviser. You can also, if you prefer and if the pension provider lets you do this, pay for your advice from your pension premiums. However, you can only do this to pay for advice about the pension that you’ve withdrawn money from.
The Pension Advice Allowance would let you use money from your pension(s) to pay for advice from a financial adviser about your retirement options in general.
Q. Would I be able to get pensions advice for £500?
A. The £500 Pensions Advice Allowance wouldn’t necessarily pay for the advice you need, although it would depend on whether you were getting face-to-face advice or advice online. If your advice cost more than £500, you could use the Advice Allowance towards it.
According to the government research, face-to-face financial advice costs £150 an hour on average and can take up to nine hours for advice on pensions, meaning you could pay £1,350 (plus VAT).
Q. How often would I be able to use the Pensions Advice Allowance?
A. The government hasn’t yet decided this but is considering limiting the number of times you can use your Pensions Advice Allowance to three.
Q. Would I be able to take £500 out of my final salary pension to pay for advice?
A. No. Under the government’s current plans, you’d only be able to use money from defined contribution (pension ‘pot’ type pensions) and personal pensions to pay for advice using the Pensions Advice Allowance. But if you had both final salary and pension pot type pensions, you’d be able to use the Pensions Advice Allowance from your pension pot pension to get advice about all your retirement options, including any questions you may have about your final salary pension.
Q. Won’t this just provide a field day for fraudsters and scammers?
A. It’s definitely possible (likely, even) that fraudsters and scammers will use the introduction of a Pensions Advice Allowance to try and fleece people out of their pensions. However, the risk of fraud would be reduced because the pension provider has to pay the financial adviser directly. If you’d saved into a pension you wouldn’t be able to take out the £500 to pay an adviser.
Q. What happens next?
A. The government is currently consulting on the rules (until October 25th) and will publish the results afterwards. You can find more information about the proposed Pensions Advice Allowance on the Treasury website.
How will the government’s Pension Wise guidance service work?
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