Does the Pensions Advice Allowance enable more advisers to offer advice to a larger number of people?
22 September 2016
Comment from Adrian Boulding, Head of Retirement Strategy at Dunstan Thomas
There is a clear need to stimulate more people to seek regulated financial advice when planning for retirement. According to an AEGON survey carried out last year, only 14% of people are confident to set their own retirement goals or know where to invest to meet these goals without financial advice.
At the same time there appears to be clear benefits from getting sound retirement advice: the independent UK directory of advisers Unbiased, found that those that sought retirement advice well ahead of retirement, increased retirement saving by an average of GBP 98 per month as a direct result.
So on 30th August 2016 HM Treasury (HMT) launched a consultation seeking the industry's views on its proposed GBP 500 tax-free Pensions Advice Allowance which was initially signposted in the Financial Conduct Authority Financial Advice Market Review (FAMR), published just two days before George Osborne's last budget, on 14th March 2016.
This Budget also declared that it would increase the tax exemption for employer- arranged pensions advice from GBP 50 to 500, and remove the cliff edge that meant that if an employer spent more than GBP 150 on advice for each workplace pension participant, the whole amount became taxable.
It was also stated that this tax exemption could be used in conjunction with the new Pensions Advice Allowance, to give people access to up to GBP1,000 of tax advantaged financial advice. Both measures are due to come into force from 6th April 2017.
The above was a response to two recommendations laid out in FAMR: the first was detailed in Recommendation #13, tasking HMT with exploring ways to improve the existing GBP 150 income tax and National Insurance exemption for employer-arranged advice on pensions to encourage more advisers to take the plunge into retirement planning advice. The second (Recommendation #14) asked the Treasury to explore options to allow consumers to access a small part of their pension pot before the normal minimum pension age, to redeem against the cost of pre-retirement advice.
So the new Pensions Advice Allowance is a direct response to the latter recommendation. It means that consumers will be able take the GBP 500 and use it to access an automated retirement advice service that provides a personalised retirement plan or, more preferably, put the money towards regulated face to face financial advice. It cannot be put towards unregulated advice or guidance, the consultation states, as otherwise it would be difficult for providers (and by extension the FCA) to keep an eye out for fraudulent tapping of peoples pensions by advice scammers.
Its very welcome that the allowance is restricted to genuine advice and not conflated with guidance as happened in the 2014 Budget. This reinforces two of the key values of financial advice it offers a personalised recommendation of the way forward and access to redress for the rare occasions when advice proves to be flawed.
The Government proposes that the Pensions Advice Allowance should be made available before the age of 55 to enable individuals to plan for retirement well in advance. This consultation invites comments on the exact age from which the allowance should be available so we will know that soon after this consultation closes on 31st October 2016. The importance of early pension contributions suggests that the allowance could be available up to 15 years before retirement, perhaps even earlier.
In addition, there is some thinking on allowing consumers to tap the allowance several times, perhaps up to a maximum of three times per person, at to be identified distinct stages of retirement at which most people could benefit from repeat advice.
Restrictions are likely to apply to this tax break. It looks likely only Defined Contribution (DC) pension scheme holders will be eligible. Furthermore, providers participating will need to facilitate adviser charging. So if providers cannot enable adviser payment through reduction of the value of the clients funds by the amount of the adviser charge, and then transferring these funds directly to their clients adviser, they may not be able to participate.
It also looks like pensions offering guarantees will not be admitted. Some of the annuity guarantees date from an era of very different interest rates and can often double the apparent value of the pension pot.
Defined Benefit (DB) pensions are also unlikely to be included, which will be a relief to trustees and employers already burdened by complex benefit structures. But today, most people with a DB pension also have a DC pension pot somewhere, so they will be able to take the Pension Advice Allowance from that.
So assuming that you have an employer or personal DC pension, you could well be eligible for GBP 500 of tax free for advice up to three times in the run up to retirement. In addition, those in DC based employer schemes should attract a further GBP 500 tax free cash to put towards advice. The implication is that this tax exemption on employer-arranged pensions advice is hard-wired into Pensions Advice Allowance which would indicate that it could also be claimed up to three times in the run up to retirement.
However, are three lots of GBP 1,000 available for advice over perhaps a 10-15-year period on the run up to and into retirement, enough to bring more regulated advisers into the market for non-high net worth customers?
As the consultation paper indicates, any retirement planning financial advice event, combined with its associated administration would amount to at least 9 hours of an advisers time at an average of GBP 150 per hour, leaving a bill of GBP 1,350 so there will be a shortfall of perhaps GBP 350 for each face to face advice session.
I believe that, welcome though these tax stimuli are to seek financial advice, there also needs to be a fundamental shift in financial education around retirement planning. The focus needs to be put much more on defining retirement outcomes, and then putting plans in place to realise them.
There still remains a massive and fundamental gap in individuals understanding of what and when they need to save, and indeed, how much they should be targeting to live on in retirement. To date scheme provision has placed too high a focus on setting a contribution structure, investment options (linked to risk profile) and then deluging customers with verbose and complex product literature which is rarely read and even more rarely understood. It would be much better to focus on retirement outcomes the level of real income that the individual wants and can expect, given current status indicators, in retirement.
Advisers looking to get (back) into retirement advice or increase focus in this area, need to be encouraging providers to provide online tools to stimulate outcomes- focused retirement planning. For without this sense of reality, policy holders will continue to lack the engagement in the gritty problem of retirement income building. Retirement provisioning can appear a fantastically unreal mountain to climb, so why bother cutting through the undergrowth in the foot hills?
They also need to be encouraging providers to develop automated systems which nudge the customer in the right direction. So if the portfolio a customer has selected is trending downwards (or upwards) that might be the trigger for a push notification via the providers mobile app to tell you that you might want to talk to your adviser with a view to adjusting your portfolio and/or increasing regular contributions.
For an idea of how outcomes-based thinking plays out in the workplace pensions world you can go to this Hymans Robertson video on their analytics-driven Guided Outcomes offering for employer schemes. Imagine what you could do with a regular business intelligence-led report which shows which of your customers are likely to fail to reach their pre-defined retirement income target, for example.
In addition, DC workplace pensions advice seems like a great opportunity to take advantage of these new tax breaks to extend advice to more clients because, apart from anything else, you can benefit from economies of scale. It will be possible to fill your diary with back-to-back meetings with one employer, meeting up to 8 per day in one meeting room, making it possible to offer advice profitably even for clients who do not have large retirement pots right now (but may well do so in the future).
After all, such is the success of auto-enrolment that already 61/2 million new savers have workplace pensions and are saving automatically escalating amounts into their policies. These new savers are set to save between GBP 14-16 billion a year in workplace pensions schemes by 2020. These facts, combined with new tax breaks on financial advice, must make the workplace pensions market a much more interesting and potentially fruitful market for IFAs to operate in going forward.Adrian Boulding is Director of Retirement Strategy at Dunstan Thomas