Currently there are two main sources of help with advice costs:
- A ‘Pensions Advice Allowance’ (PAA) which allows savers to take £500 out of a Defined Contribution pension pot to redeem against the cost of retirement financial advice. This can be done up to three times provided that this is across three different tax years;
- Tax relief on employer-funded financial advice – this comes in two forms:
Where employers provide or pay for financial advice, the first £500 of the cost of advice is exempt from income tax or NI contributions;
For DB pension transfers, where members receive communications which encourage them to consider a transfer, the employer funded advice which must be provided is fully exempt from income tax and NI;
LCP point out that there are several drawbacks to the existing allowances, which contribute to poor take-up. In particular:
- A cap of £500 on the PAA and on general employer-funded advice may cover only a small part of the total cost of financial advice, especially in the case of DB transfer advice;
- Regarding the Pensions Advice Allowance, many pension providers say that their systems were not set up to allow for this, and that there is insufficient demand to make the necessary changes; as a result even members who know about the allowance and want to use it may find that their provider does not allow them to do so;
- The rules around both types of allowance are very restrictive; for example:
The PAA cannot be used towards the cost of DB transfer advice;
The employer-funded advice only qualifies for a tax break on the first £500 if the offer is available to all employees (or all employees at a particular location aged 50+), and can be used on all pensions, even those with no relation to the employer who is funding the advice;
The tax and NI break on funding DB advice only applies where the employer has issued communications designed to ‘encourage, persuade or induce’ a transfer, and where mandatory advice has to be offered; many employers would be very wary of communicating with employees in this way, and so the tax break is of limited relevance.
LCP are calling for the value of the allowances to be increased beyond the current £500 limit, for more to be done to ensure that providers offer and promote the allowance, and for other restrictions to be relaxed to encourage take-up.
Clive Harrison, partner at LCP said: “The Chancellor should use his Budget to improve the tax breaks for financial advice, which are simply not working as things stand. The current allowances are too low and too restrictive, and even when members know about them and want to use them they may find that their pension provider refuses. There is no doubt that good financial advice can add real value, and far too few people are taking up advice. Reducing the cost of advice through tax breaks is a step in the right direction, but much more needs to be done to make these schemes more effective”.
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