The launch of a public consultation on the pension advice allowance at the end of August is another product of the Financial Advice Market Review (FAMR).
One of FAMR's 28 recommendations (see our March blog), was to explore options for a pensions advice allowance and this is what the current consultation aims to do.
The consultation is open to individuals and organisations until 25 October 2016 with implementation of the allowance expected in April 2017.
It is envisaged that consumers will be able to use up to £500 of their pensions, tax free, to pay for regulated advice on their pension arrangements, before they reach the minimum pension age. There is no suggestion that the 25% tax-free lump sum available when consumers turn 55 will be affected.
Whilst the Government has a framework in mind the consultation is to fine tune exactly what the parameters will be.
Some of the questions raised in the consultation are:
- The age at which the allowance should be available to consumers.
- How many times consumers may use the allowance (recognising that consumers' circumstances change over time).
- How to maximise awareness of, and access to, the allowance.
- The scope of the advice that the allowance can be used for.
Consumers with defined contribution pensions will be able to use the allowance, but those with defined benefit pensions will not. If consumers have both, then they are likely to be able to use the allowance to obtain advice on their pension arrangements as a whole.
The introduction of pension freedoms and automatic enrolment in workplace pensions are two key factors that have exacerbated the impact of the widening advice gap. The pension advice allowance is intended to ease access to advice for the less wealthy by making advice more accessible and affordable.
Although there is a question mark over whether £500 is enough, there are more serious concerns. Will the introduction of the allowance attract fraudsters, particularly if consumers are permitted to use it multiple times? One anticipated safeguard is to ensure the payment goes directly from the pension fund to the adviser - but that won't stop fraudsters impersonating an authorised person or unscrupulous firms charging for little or no useful advice. It is not clear whether, or how, a successful balance can be struck between affording sufficient access to the allowance and limiting the scope for scams.
Implementation of the allowance is expected in April 2017 and whilst the initial uptake may be easily quantifiable, there is likely to be a longer wait to see the real effect it has on the advice gap.