Calling for review of tax breaks to help people get the advice they need
Pensions are hard. It’s clear that expert advice helps people. But it is also clear that too few people are taking advice and that good advice can be hard to come by.
There are two tax breaks that government has introduced to help incentivise individuals to take advice, but both are hardly used. I believe there should be an overhaul to ensure these are fit for purpose and meet their original policy intention. Insurers, trustees and employers should then be encouraged to implement and communicate these routes to advice.
Research
The International Longevity Centre UK (ILC) research1 shows that those individuals who had received professional financial advice in the past had a total boost to wealth (in pensions and financial assets), per person, of nearly £50,000 on average. In addition, they found that the benefits of financial advice are potentially greater for those “just getting by” than for those considered “affluent”: the former would have seen a 24% boost to their pension wealth compared to 11% for more affluent groups. Yet FCA data suggests that just a third of individuals accessing their pension pots for the first time obtained and benefited from regulated financial advice2. In addition, the FCA’s Financial Advice Market Review found that there is an ‘advice gap’ for retirement advice for people without significant wealth, and LCP‘s and Aviva’s joint report3 found that it is increasingly difficult for DB pension scheme members to get pension transfer advice. Our financial advice system and framework is clearly not working as well as it could be.
Available tax break – Pensions Advice Allowance
As part of the introduction of the Pension Freedoms in 2016 the Government introduced the Pensions Advice Allowance. It was intended to allow members of defined contribution pension schemes and hybrid pension arrangements with DC or cash balance benefits to take £500 (up to three times across three different tax years) from their scheme to redeem against the cost of retirement financial advice (or implementation of such advice), in a tax efficient manner.
The Pensions Advice Allowance could be a great mechanism to reduce the ‘advice gap’. However, take-up has been very poor as nearly all pension providers have not made it available (often citing lack of demand) and member awareness is low4.
I would like to see a review of the Pensions Advice Allowance to boost its effectiveness. In particular, I would like to see insurers and trustees encouraged to offer the Pensions Advice Allowance where permitted, and for all schemes to communicate the option. I would also propose an increase in the limit from £500 to something more likely to cover basic pensions advice costs and I would like to see the scope of the Allowance widened so a member can use it towards DB advice - including DB transfer advice - particularly now that contingent charging has been banned.
Available tax break – employer funded advice
In addition, the Government allows employers to fund pensions advice for their employees and for this to be exempt from income tax and national insurance contributions in certain circumstances. Again, this had the potential to be a great incentive for employers to help reduce the advice gap. However, in my experience the qualifying criteria, summarised below, are far too narrow to be helpful and therefore employers rarely qualify for the exemption.
The employer-arranged pensions advice exemption can cover the first £500 worth of pensions advice provided (or paid for or reimbursed to) to an employee in a tax year. However, this is subject to tight restrictions which prevent most employers from utilising it, including a requirement to make the option widely available to all employees or all employees at a particular location who have reached age 50, and for the advice to cover a very wide scope including an employee’s other pension arrangements, which may not make sense to an employer. I would like to see a review of these conditions (so it could be offered to a more focused group of individuals for example only members age 55 or above or limited to a certain number of occasions per employee). I also would like the £500 limit to be increased reflecting the increased cost of advice since the facility was first introduced in 2017. Unless such changes are made, I fear this apparently generous provision will continue to hardly be used by employers.
Separately, for DB pension transfer advice, where communications are issued to a member which “encourage, persuade or induce” them to transfer, the employer funded advice which must be provided is income tax and NI exempt. However, most employers would be very reticent to communicate to their employees in such a manner. Instead, many employers simply wish to help their employees by communicating options in a fair and balanced way rather than with the objective to “encourage, persuade or induce”. Therefore, because the employer is looking to help members, rather than induce them, they don’t qualify for this exemption. This seems perverse.
Conclusion
It’s all well and good introducing such options, but the constraints are such that they rarely get used and are therefore pointless. If we are going to really help people, we need a detailed review of policy and rules in this area.
With amendments to both the Pensions Advice Allowance and the employer funded advice, and encouragement for insurers, trustees and employees to offer and communicate these options, I believe these routes to advice would become much more widely used, which would help close the ‘advice gap’, and ensure that many more people benefit from financial advice.
If you are considering putting in place financial advice for your employees or members please contact me, Jonathan Camfield or Steve Webb.
[1] https://ilcuk.org.uk/wp-content/uploads/2019/11/ILC-What-its-worth-Revisiting-the-value-of-financial-advice.pdf
[2] https://www.fca.org.uk/publication/consultation/cp21-11.pdf
[3] https://www.lcp.uk.com/media-centre/2021/10/on-point-paper-mind-the-transfer-advice-gap/
[4] https://www.moneymarketing.co.uk/news/gov-refuses-to-review-pensions-advice-allowance/