Government plans £500 incentive for valuable pensions advice

The Government has asked the pensions industry how it might offer prompt UK retirement savers to seek financial advice on funding old age in a move that could see an extra £500 of individuals' savings freed up to cover the cost of professional guidance tax-free.

As the number of people saving for old age soars thanks in large part to automatic enrolment in a workplace pension, the the proposal is designed to boost the worryingly low proportion of people who currently seek advice on how to access, use and manage their pension pot. Despite research from unbiased.com which has found that those who do use a financial adviser improve their average monthly retirement income by almost £100, less than a third of retirees do so.

A review of the financial advice market last year found that financial advice was seen as either too expensive or 'not for people like me'.

Under current plans, the £500 tax free allowance would be in addition to the 25 per cent lump sum currently available for new retirees without incurring tax. Alongside a newly increased £500 allowance for employer-based advice, this could mean £1000 of advice allowance were the plans to be introduced in their current form from next April.

Commenting on the plans, Fiona Tait, pensions specialist for Royal London said: “It is important that the allowance should be available to people well before they reach retirement as this could be too late. So we agree with the FAMR recommendation that the allowance should be available from an earlier age than 55. This would give people still time to fund their pension pot if possible; otherwise they are unlikely to have a realistic degree of choice when they do choose to retire. We also support allowing this option more than once, for example at key birthdays or life changes.”

However, after new rules were introduced last year allowing savers access to their pots after the age of 55 prompted a boom in the number of fraudsters posing as advisers to capitalise on saver confusion, the Treasury itself has raised concerns about the potential for pension fraud that the change could invite,

"For example, if the allowance could be used an unlimited number of times, some people may see this as an opportunity to imitate an adviser and persuade individuals that they can withdraw the allowance multiple times from multiple pension pots for other uses," the consultation paper states. "If £500 could only be withdrawn a limited number of times, this type of scam would be less likely to take place."

Critics have warned that the allowance would not be enough to cover the cost of comprehensive good-quality advice and warn that the allowance may not be available to all retirement savers.