The new pension advice allowance – is it right for you?

“Should I pay for professional advice or go it alone?” Even the savviest investor will likely ask themselves this question as they approach the complex world of retirement planning.

While many will decide they feel confident enough to invest their money without the help of a regulated adviser, some will feel they need steering in the right direction and others could benefit from a full advice session.

However, most savers baulk at the cost of advice, which has risen as a result of the Retail Distribution Review, a regulatory overhaul instituted at the beginning of 2013 to boost standards in the advice profession.

This is a concern to policymakers because advice can improve savings rates. According to Unbiased, an adviser directory, those who seek retirement advice increase their retirement savings by an average of £98 per month. Furthermore, the pension freedoms increase both choice and complexity for investors, making advice potentially more valuable than ever before.

In response, the Government has proposed introducing a new £500 Personal Advice Allowance to encourage more people to speak to a professional about their retirement options.

What is the Government offering?

Before you get too excited, the Government isn’t offering to pay on your behalf. However, it is proposing to allow you to take up to £500 tax-free from your pension pot before age 55 to pay for retirement advice. This will become available from April 2017 and will be in addition to the 25% tax-free cash you are entitled to after age 55.

Because retirement is a journey rather than a one-off event, the Government is considering allowing you to use the allowance more than once (the consultation suggests up to three times, although this is not yet set in stone).

Is it a good deal?

The allowance is certainly better than the existing incentives. At the moment, so-called ‘adviser charging’ rules allow you to pay for advice from your pension pot – but only if the advice is restricted to that particular product.

If funds taken from a pension scheme are used for wider retirement planning, including advice on other pension schemes or non-pension investments such as ISAs, this would be an unauthorised payment and taxable at a minimum of 55% under the pension tax rules. Not particularly helpful if you want a full financial plan.

Under the new rules, however, up to £500 can be put towards a holistic financial plan without being taxed.

However, it is unlikely to be enough to pay for a full advice session. According to the Treasury, face-to-face advice costs £150 per hour on average, and can take up to nine hours for pensions – meaning even with the allowance you still might have to make up a shortfall of £850. While in most cases paying this much advice will be money well spent, for many it will still be simply too expensive – although the Government is hopeful new automated ‘robo-advice’ can be delivered at a lower cost (and lower price to savers).

The sting in the tail

One of the biggest challenges with the new proposals is how to monitor activity and prevent fraud. There is a significant risk, acknowledged by the Treasury, that fraudsters will be incentivised to imitate regulated advisers in order to get their hands on savers’ hard-earned pension pots.

The Government therefore need to think carefully about the risks associated with allowing multiple uses of the £500 advice allowance and how this will be monitored if someone has multiple pension schemes with different providers.

It’s vital the regime is carefully designed so it is robust, with controls in place to ensure the money is only used to pay for regulated financial advice.