Government to introduce Pensions Advice Allowance

The tax-free amount would be in addition to the normal 25% tax free allowance and would also be available before the age of 55.

The government proposes the new allowance can be be redeemed against all fully regulated advice services, including automated advice models, but will only be available for DC pensions and not final salary.

In its consultation, the government explained: "One reason for this decision is that defined benefit pensions are not eligible for flexible drawdown, and do not require the holder to purchase an annuity. Therefore, the government considers that the decisions to be made at retirement are likely to be less complex, and the need for advice not as great. Additionally, a disproportionately complex system would be required to administrate the withdrawal of the allowance from a defined benefit pension.

"However, if a consumer has both defined benefit and defined contribution pensions they would be able to use the Pensions Advice Allowance to get advice on all of their pension assets, including the defined benefit pensions."

Although the Allowance will initially be limited to £500 per use, the government is seeking input on whether to allow multiple uses of the allowance to enable individuals to get advice at different points of retirement.

Its consultation also invites comments on the exact age from which the allowance should be available.

The Treasury also condfirmed that offering the Pensions Advice Allowance would not be mandatory for pension providers, but will "encourage the majority of defined contribution schemes to offer the allowance".

The government announced at Budget that it would increase the tax exemption for employer arranged pensions advice from £150 to £500, and "remove a cliff edge" that meant that if an employer spent more than £150 on advice, the whole amount became taxable.

The government says it is now 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. Both measures are expected to come into force from April 2017.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, commented: “This is good news for consumers, extending the ways in which they can access professional help as they approach retirement. There are various risks which will need to be guarded against, such as fraudsters targeting this new facility by pretending to be financial advisers, or investors splitting their pension into multiple small pots to strip all their money out in £500 tax free chunks with the help of an adviser. There may also be complications with some robo-advice models, which charge relatively little for the advice but substantially more for the subsequent administration services.”

“The government has also flagged the age at which this facility should be available as an issue for consultation. This is important because the vast majority of investors only consider their retirement options within the last 2 years before they draw on their pension pots; for many it only happens a few months out. By permitting access earlier, for example from age 55, the government may succeed in driving a behavioural change towards earlier engagement with retirement options.”