The new Pension Advice Allowance (PAA), first announced in the Autumn Statement 2016, will enable people to withdraw £500 on up to three occasions from their pension pots to put towards the cost of pensions and retirement advice from April 2017.
Following an eight week consultation, Simon Kirby, the UK’s economic secretary to the Treasury, has confirmed that the £500 allowance can be used a total of three times, but only once in a tax year.
The PAA is designed to allow people to access retirement advice at different stages of their lives, for example when first choosing a pension or just prior to retirement
It will be available at any age, allowing people to engage with retirement planning at any stage, said a statement on the UK Treasury website.
It can also be redeemed against the cost of regulated financial advice, including ‘robo advice’, as well as traditional face-to-face advice
Additionally, it will be available to holders of “defined contribution” pensions and hybrid pensions with a defined contribution element, but bars “defined benefit” or final salary type schemes.
Pension providers will also be able to offer the allowance to their members from April 2017.
In Friday’s announcement, the Treasury cited research that found on 22% of people approaching retirement know the value of their pension pot, with just 14% of peopleconfident about planning their retirement goals without financial advice.
According to Unbiased, UK savers with a pension pot of £100,000 save an average of £98 more every month and receive an additional income of £3,654 every year of their retirement if they take financial advice.
“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 their retirement,” said Kirby.
Not enough?
Tom Selby, senior analyst at AJ Bell, said the introduction of the advice allowance is an “improvement on the existing system”, but warned that “we need to be realistic about what this will achieve”.
“According to the Treasury’s own analysis, 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,” he said.
“The sector is clearly evolving and innovative ‘robo-advice’ models may develop to help people assess their retirement options. But we are some way from that point at the moment and the government should not see the advice allowance as some sort of panacea that will magically solve the UK’s advice gap.”
FAMR
The UK government first suggested the proposal back in March during the annual budget, based on recommendations by the Treasury and Financial Conduct Authority’s (FCA) joint Financial Advice Market Review (FAMR).
FAMR found that there is an ‘advice gap’ for retirement advice for people without “significant wealth”, calling on the treasury to introduce a tax free stipend from pensions to make financial advice more affordable and easily accessible.
