Maggie Williams looks at plans to help members make better decisions at retirement
From April 2017, DC scheme members will be able to make use of a £1,500 tax-free ‘pensions advice allowance’, paid from their pension pots.
On the surface that’s a marked improvement from current arrangements, but there are strings attached. No more than £500 can be used in a single tax year, and the total must be accessed across three separate tax years.
The new ruling only applies to savers in DC and hybrid schemes – DB members do not qualify.
The three-way split of withdrawals was more generous that we expected
The Financial Advice Market Review, released in March last year, recommended allowing individuals to take tax-free withdrawals from their pot for advice. Tom McPhail head of retirement policy at advisers Hargreaves Lansdown praised the government for “delivering on its commitment to help ordinary savers and investors,” saying that the three-way split of withdrawals was “more generous that we expected”.
Making sure that scheme members can get access to regulated advice has become increasingly important. Recent research by financial advisers Wealth at Work showed that 55% of employers provide no support or information-only for employees at retirement, and 48% believe that their staff are not aware of the retirement options available to them. “It’s very clear that many employees are simply abandoned at retirement and are left incredibly vulnerable to making poor decisions due to the lack of support available,” said Jonathan Watts-Lay, director or Wealth at Work.
A single payment of £500 is unlikely to get anywhere near meeting the cost of face-to-face advice
Malcolm McLean, senior consultant at Barnett Waddingham, welcomed the increased figure, but was less impressed with the £500-per-year restriction. “A single payment of £500 is unlikely to get anywhere near meeting the cost of full, traditional face-to-face advice,” he said. McLean conceded that it “might suffice for a very basic form of robo-advice”.
He also questioned whether the Treasury should be placing limitations on how individuals used what is, ultimately, their own money. “We should remember that this is taken out of the individual’s own pension pot and, apart from perhaps specifying an overall limit, I am not sure the Treasury should be dictating how and when the allowance can be used.”
McLean called on the Treasury to provide more flexibility when drawing up the draft regulations. McPhail added that the advice industry will also need to identify ways of recording and policing the new regime, as “at the margin there might be some very limited scope for abuse of the rules”.