People planning their retirement will be able to withdraw up to £1,500 from their pension savings tax-free to put towards the cost of financial advice, the Treasury has confirmed.
The Pension Advice Allowance – first announced in the Autumn Statement 2016 – was set to be a one-off £500 tax-free contribution.
However, following a consultation, the Treasury has decided to allow savers to access £500 tax-free from their pension pots up to three times from April 2017.
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How it will work
[SPOTLIGHT]The £500 allowance will be available to pension savers seeking financial advice at any age. This won’t be taxed when withdrawn from a pension pot regardless of an individual’s income.
It can be used a total of three times, but only once in a tax year to ensure people access help with their retirement planning at different life stages.
The Pension Advice Allowance will be available to ‘defined contribution’ pension savers as well as ‘hybrid’ pension savers with a money purchase or cash balance element.
The £500 lump sum can be used to pay for the cost of regulated financial advice, which can take the form of ‘robo advice’ or traditional face-to-face meetings.
The Pension Advice Allowance will be able to be used alongside the tax exemption for employer arranged pensions advice, which means an individual could get up to £1,000 tax-free to use for advice in a year.
Pension providers will offer the Pension Advice Allowance to members from April 2017.
Why advice is important
The Treasury claims just over one in five (22%) people know the value of their pension pot, while only 14% would be confident in planning their retirement without financial advice.
There are also concerns that new freedoms introduced in April 2015, which allow pension savers greater flexibility to do what they like with their pots, could mean many run out of money over the course of their retirement.
Research from financial advisers Unbiased found that UK savers with a pension pot worth £100,000 saved an average of £98 every month and generated an additional income of £3,654 every year of retirement after taking financial advice.
Simon Kirby, Economic Secretary to the Treasury, added: “Pensions and savings decisions are some of the most important a person will make during their lifetime.
"This allowance will help people get the vital financial help they need to plan for their retirement.”
Will the allowance be enough?
While many have praised the decision to boost the Pension Advice Allowance, there are concerns the it still falls short of what is needed to help people access advice to make good financial decisions.
Tom Selby, senior analyst at investment firm AJ Bell, said: “The introduction of the advice allowance is an improvement on the existing system, but we need to be realistic about what this will achieve.
"According to the Treasury’s own analysis, face-to-face advice costs £150 per hour on average, and can take up to nine hours for pensions – meaning even with the allowance you still might have to make up a shortfall of £850.”
That said other experts have pointed out that if people really needed it they could double up their allowance in one year by timing access to fall towards the end of a tax year and the start of a new one.
Take a look at: Paying for financial advice: what to expect and Financial planning and financial advice explained for more.
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