Even the most casual of observers will have spotted that the world of pensions has been undergoing something of a revolution throughout the whole of the current decade, and many of these changes have directly impacted the world of workplace savings and company sponsored pension plans.
Of the many (and ongoing) changes in this space, the two biggest for the consumer (be that the employer or employee) have been:
- The introduction of auto-enrolment, which has already resulted in 6.3 million people being automatically enrolled into a workplace pension (many for the first time).
- The introduction of pension freedoms, which allow retirement savings to be used by the saver for purposes other than directly purchasing a retirement income.
It follows that with so with more people saving – and more choice about what to do with those moneys when retirement beckons – the need to ensure that consumers make the right, or at least fully informed, decision is becoming an increasing concern to politicians, Whitehall, and those within the pensions industry.
To this end Pension Wise was launched, which provides guidance on retirement decisions but not actual advice. It has been recognised by the Government that this service alone is not sufficient, and therefore steps have been taken to increase the access to formal advice services, and consider how the average consumer can afford to meet the costs associated with such a service.
With this in mind HM Treasury this week launched a formal consultation on the introduction of the Pension Advice Allowance. So what is this proposed new allowance, and how will it help those requiring advice at or near retirement?
The proposal is that savers can access up to £500 of their retirement savings to gain “holistic”* retirement advice, although it is currently unclear how far this advice can and will extend (this will presumably be clarified in later documents). This is different to the current system, where money can be accessed from a pension plan to provide advice services, but where the advice is limited to that one policy only.
So the Pension Advice Allowance will be someway more flexible and generic than the current system, and will enable those with limited funds to still access retirement advice services.
Some important points to note:
- This is likely to be available from Defined Contribution (also known as Money Purchase) pension plans only.
- Defined Contribution plans will not be required to provide the Pension Advice Allowance facility, so not all members in these schemes will be able to access this.
- The Pension Advice Allowance will not reduce the savers Tax Free Cash entitlement.
- It is unclear at what age this Pension Advice Allowance will be available from, but the consultation has suggested an age earlier than 55 (which is the current early access age to utilise Pension Freedoms) to allow for advanced planning of retirement options.
- The new allowance will be for full regulated advice only. Guidance-only services will be excluded.
- The consultation suggests that the allowance could be available more than once, to allow people to take advice at different stages of their retirement. There are, however, some legitimate concerns with this proposal that need to be ironed out, and in practice the number of uses of the allowance may well be limited. The consultation suggests a maximum of three uses per person.
All of the above is yet to be confirmed, and HM Treasury is currently seeking responses to the consultation, which closes on 25 October 2016.
The target date for the introduction of the Pension Advice Allowance is April 2017, so we should not have too long to wait to see the final proposals.
There is also a proposal to extend the tax break for employer-arranged (and funded) advice on pensions. At present the employer can fund up to £150 of pension advice, which will then be exempt from income tax and national insurance. This allowance has been available for many years, but is largely not used given the relatively low level of the benefit and a lack of awareness of the facility.
Another issue with this existing allowance is that if the employer spent more than £150, the entire amount could become taxable. This cliff-edge is problematic and therefore deters use of this important and useful tax break.
So earlier this year the Government announced this allowance would be increased to £500, and it will also remove the cliff-edge problem should the amount spent exceed this level (ie only the spend above £500 would be taxable).
This change should not be confused with the Pension Advice Allowance and is intended to be complementary to that initiative. Again, this is targeted to commence in April 2017.
To quote from the consultation document: “It is possible that the tax exemption for employer-arranged advice could be used in conjunction with the Pensions Advice Allowance, to give people access to up to £1,000 of tax advantaged financial advice.”
It will be interesting to see if the new measures are further incorporated into pension product designs and, indeed, the employee benefits offerings of employers once they are fully available and understood.