The government has confirmed that the incoming pensions advice allowance can be used alongside the tax exemption for employer-arranged pensions advice, enabling employees to access up to £1,000 of tax-advantaged financial advice in a tax year.
In its response to the Introducing a pensions advice allowance consultation, which ran between August and October 2016, the government has confirmed that individuals of any age will be entitled to withdraw funds from a registered pension scheme to pay for pensions or retirement advice.
The pensions advice allowance, which will come into effect from April 2017, can be used up to three times in an individual’s lifetime, and no more than once in each tax year. The new allowance will be limited to £500 per use.
The allowance, which can only be used for registered financial advice, can be withdrawn from defined contribution (DC) pensions and hybrid pension schemes with a money purchase or cash balance element, with the payment made directly from the pension scheme to the adviser.
The £500 that is withdrawn from the pension pot will not be taxed, regardless of the individual’s income.
The new pensions advice allowance will be promoted through nudges designed by the Financial Advice Working Group and signposted by the Pension Wise service.
The pensions advice allowance can be used in conjunction with tax-exempt pensions advice available to employees, which is being increased from £150 to £500 per employee per tax year. Employees will also be able to put the £500 employer-arranged advice towards general financial and tax issues relating to pensions.
The £500 employer-arranged pensions advice tax exemption will be available via a salary sacrifice arrangement, and will also include instances where an employer reimburses an employee for pensions advice they have arranged.
Combined, employees will be able to use the new pensions advice allowance and the employer-arranged pensions advice to access £1,000 of tax-advantaged financial advice in a tax year.
The government will launch a technical consultation on the draft regulations for the new pensions advice allowance, which will run for three weeks.
Simon Kirby, economic secretary to the Treasury, said: “Pensions and savings decisions are some of the most important a person will make during their lifetime. This allowance will help people get the vital financial help they need to plan for retirement.”
Tom McPhail, head of retirement policy at Hargreaves Lansdown, added: “For most investors, there are occasions through their working lives when financial advice can make a big difference. This recommendation, to allow tax-free withdrawals from pensions to pay for pension or retirement advice was part of the Financial Advice Market Review, so it is good to see the government delivering on its commitment to help ordinary savers and investors.
“The decision to allow up to three bites at the cherry is more generous than we expected. There will be some challenges for the industry in recording and policing this new facility, but it should help investors to make the most of their wealth. This is good news for investors, advisers, for pension providers and the government.”
Steven Cameron, pensions director at Aegon, said: “We welcome the pensions advice allowance as a further means through which individuals can pay for valuable advice on their pension planning. 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 professional advice.
“We’re pleased the Treasury has decided against setting any minimum age before an individual can use the pensions advice allowance. Allowing it to be used up to three times is also a step in the right direction [because] people can benefit from advice on different aspects of their retirement planning at different ages or in different circumstances.”