The government understands that independent financial advice is valuable, but realises that the cost can be a disincentive for some. The pensions advice allowance (PAA) is the government’s solution to enable members to pay their regulated independent financial adviser (IFA) for such advice from the savings they have accumulated in their defined contribution pension scheme from 6 April.
While on the face of it, this seems a good idea, pension schemes are not required to offer this and there will be no statutory override. However, for those schemes that do wish to offer the facility to members, there are four main points to consider, provided their rules allow or are changed to allow such payments.
The pension advice allowance
The allowance will be:
- up to £500 per use, with up to three uses in a lifetime (no more than one per tax year)
- available at any age
- not taxable, regardless of income
- available only from defined contribution pension savings
The payment must be made direct from the pension scheme to a financial adviser regulated by the Financial Conduct Authority (FCA) for the provision of regulated financial advice.
What can the pensions advice allowance be used to pay for?
Retirement financial advice is wider than regulated pensions advice and is intended to include consideration of other factors, including other assets owned by the individual. It may include advice on drawdown, sufficiency of income and funding care costs but may not include inheritance tax (IHT) planning or advice on investment funds that will not be used for retirement.
How much advice will the pensions advice allowance pay for?
There is a great deal of generic information available already; the problem is that it is often lengthy because of the complex nature of pension planning. The hourly rate of regulated IFAs reflects the experience and qualifications that they have. As a result, £500 is likely to contribute to the cost, rather than covering the whole cost of advice.
Can advice be paid for by the employer?
The simple answer is yes. Employers can pay for financial advice provided to the employee. If they wish to provide advice for an individual, then they can now contribute up to £500 in a tax year (previously £150), without it being treated as a taxable benefit in kind for the employee. Employer-funded advice can be provided irrespective of whether the employee also makes use of the PAA.