Pension Advice Allowance: leading providers don't offer key perk

Some of Britain's biggest providers are skimping on the Government's Pension Advice Allowance perk. Are you losing out?

Millions of investors are missing out on valuable financial advice as some pension firms fail to offer them access to a £1,500 ‘Pension Advice Allowance’.

Back in April, the Government introduced a new Pension Advice Allowance, which allows people to take £1,500 tax-free from their pension pot to pay for financial advice as they approach retirement.

Fast forward three months and millions are missing out on this tax perk as pension firms including Prudential, Royal London and Aviva are not allowing their clients access to the allowance.

What is the Pension Advice Allowance?

The allowance was introduced in order to combat the so-called ‘advice gap’, a concern that millions of people weren’t getting financial advice before accessing their pension savings. It’s hoped the allowance will help people pay for that valuable advice.

Under the new tax rules, you can now make up to three tax-free withdrawals of £500 in separate tax years to pay for the cost of getting advice from a regulated financial advisor. That said, pension providers aren’t required to offer the allowance by law, and as a result many aren’t bothering.

Why aren’t they offering the perk?

A Prudential spokesperson told the Telegraph it didn’t offer clients the Pension Advice Allowance due to there being “minimal demand” for it and it would be “complicated to administer”.

Aviva has said it may introduce the allowance if enough clients express an interest in it.

Other big pension firms, including Standard Life and Hargreaves Lansdown, have made the necessary changes in order to offer their clients access to this tax break.

For basic-rate taxpayers the allowance is worth £300, while higher rate taxpayers could save £600 by using the allowance.

What is the Pension Advice Allowance?

The allowance is available to anyone with money invested in a defined contribution pension regardless of age and you can use it three times. It's also open to 'hybrid' pension savers with a money purchase or cash element.

That means that over your lifetime you can spend up to £500 in three separate years on financial advice to help you assess your finances. You can use it to make sure you are on track to meet your retirement ambitions or, as you approach retirement, you could get advice on how best to use your pension savings.

The £500 lump sum can be used to pay for the cost of regulated financial advice, which can either be in the form of 'robo advice' or face-to-face meetings. It can be used alongside the tax exemption for employer arranged pension advice, you could potentially get up to £1,000 tax-free to use for advice in a year.   

Your money is paid directly to your advisor, so you can’t just grab £500 from your pension and spend £150 on advice and the rest on anything you fancy. When you consult your advisor the money will be taken straight out of your pension.

If you do want to use the Pension Advice Allowance, make sure you follow the proper channels to access the money, get it wrong and you could be taxed up to 55% on the amount you withdraw. That’s the tax rate for ‘unauthorised withdrawals’ from your pension if you are under 55.

There's a clear difference between financial advice and financial 'guidance' though – some dodgy companies might be out to fool you so you should get in the know. Read more at Pension Advice Allowance: will your consultation be legitimate?

What about investing your pension in a SIPP instead? Find out more at the loveMONEY investment centre (capital at risk)

Read more on pensions:

Pension exit fees loophole: will you be charged more?

State Pension rise: insurance loophole could put workers at risk

State Pension age change: what it means for you

Pension tax blow: were you caught out?

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