How an early £500 could help you pay for advice
First published on 11 of April 2016 • Updated 25 of July 2017
Soon you may be able to make an early tax-free pension withdrawal to pay for financial advice on your retirement choices. Why is the government proposing this option now, and why should you be interested?
They say the early bird catches the worm. One easy-to-miss snippet in the recent Budget was a proposal to allow people to access a small sum from their pension before the watershed age of 55 – for the sole purpose of paying for professional financial advice. If confirmed, it may allow everyone with a pension pot to take up to £500 tax free from their pension up to ten years early.
It’s a measure of how seriously the government is taking the issue of advice for all pension savers. Pension freedom has been welcomed by the vast majority, but it has created potential long-term problems. The government introduced Pension Wise as a free service providing pension guidance, but has already recognised that this is no substitute for individually tailored advice.
The proposed incentive would address two of the main obstacles that stand between people and advice: firstly the cost, but also having the idea in the first place. The government has recognised that most people will need a ‘nudge’ towards advice, and that this new facility could give them that.
How it might work
The option to draw out a ‘pensions advice allowance’ may be granted around five to ten years before the normal minimum pension age (currently 55). The exact age is yet to be determined by the consultation. Being able to do this some years in advice of taking a pension should in theory give people enough time to make retirement plans and, if necessary, increase their pension contributions.
It’s not yet clear how the money would be withdrawn, but the most likely method is as some form of voucher, or even a direct payment to the chosen adviser, to ensure that the money is used for its intended purpose.
The fact that the withdrawal is tax free (and presumably will not count towards the existing tax-free 25 portion of the pension) is significant. This effectively means that the government would subsidise a basic-rate taxpayer to the tune of £100 when they seek advice (and a higher-rate taxpayer would be subsidised by £200).
This nudge-plus-incentive is clearly designed to help people see financial advice as an essential step towards retirement. It’s widely accepted that most people buying a home need a solicitor, a surveyor and an estate agent. It may soon become equally accepted that people approaching their pension age need a financial adviser.
Will the ‘pension advice allowance’ cover the cost?
The big question is this. When it comes to advice, what can you actually get for £500?
The Cost of Advice report by unbiased.co.uk revealed the current average fees for financial advice given at retirement. Here is a small selection of typical fees:
|Advice on an £80 a month pension contribution||£500|
|Advice on a £200 a month pension contribution||£580|
|Converting a £30,000 pension fund into a
lump sum and annuity
| Converting a £100,000 pension fund into a
lump sum and annuity
|At retirement advice on £100,000 pension
pot (client requires full advice)
From these figures, it’s clear that a £500 withdrawal may well cover most or all of the cost of advice on pension contributions in advance of retirement. However, it would only partially meet the cost of advice on accessing a pension pot.
However, you need to bear in mind that advice on pension withdrawal is not a zero-sum game. People pay for such advice on the understanding that it greatly increases their chances of being financially better off overall. That is, an adviser who charges £2,000 for advice on a £100,000 pension pot does so on the premise that they will deliver more than £2,000 worth of additional value in the long term.
And remember that it is long-term – like buying a home. In fact, let’s look at retirement alongside the home-buying process and see how they compare.
The costs of pension advice vs the costs of home-buying
As mentioned earlier, when people buy a home they expect to have to pay certain professionals for their services, in order to ensure that the whole process is successful. According to a recent survey by Prudential, the average UK home-owner lives in their home for 21 years. By an interesting coincidence, this is almost exactly the same length as the average retirement today. We can safely say then that retiring is at least as major a life change as buying a home.
So let’s look at the average cost of advice on buying a £100,000 home:
|Solicitor (purchase only)||£800|
|Surveyor||£450 (Homebuyer’s report) OR
£1,000 (Building survey)
|Estate agent (at 1.5% plus VAT)||£1,800|
£3,050 / £3,600
Putting these numbers alongside the Cost Of Advice figures for a £100,000 pension pot, we see that pension advice can be as little as half the cost of advice on a home of comparable value. On the wider scale of professional advice, financial advice tends to be less expensive than the other kinds that people are used to paying for. The benefits, however, are similar: twenty or more years of peace of mind.
If you’d like to find out more about what advice can offer you, in preparation for the pension advice allowance, many advisers offer free initial meetings to discuss your needs. You can find yours with our smart postcode search.