First the facts
The Treasury has upped the amount savers will be able to draw from their pensions to pay for financial advice from £500 to £1,500.
In August, the Government set out plans for a £500 “pensions advice allowance” on the back of the Financial Advice Market Review’s recommendation that consumers should be able to access a small part of their pension pot ahead of minimum retirement age to offset the cost of pre-retirement advice.
After consultation, the Government has now opted for a £1,500 limit, to be accessed in £500 blocks on up to three occasions.
A financial wealth cheques
£500 is not enough to conduct a full retirement review but too much for a financial health-check. It is in fact a financial advisory wealth cheque, which mortgages the retirement fund in three painless stages and subsidises advice that would otherwise have been paid out of taxed savings.
It is massively tax-subsidised. The majority of people who voluntarily seek financial advice are looking to pay less tax, to allow them to do so from a tax incentivised savings pot is double tax-relief. As most advisers us the VAT exemption that allows advice on insured products to be VAT exempt, expect a VAT subsidy too.
The beneficiaries of the financial advisory “£500 wealth cheques” will be financial advisers. They can even get employers to pimp them some income.
The allowance can be used in conjunction with a new £500 tax exemption for employer arranged pensions advice that was also recommended by the FAMR and coming in to force in April. This allows employers to pay a further £500 wealth cheque to an adviser from its own resources and for the balance of cost to be picked up from a member’s pension pot.
No NICs or income tax on the benefit in kind, a write off against corporate profits, the balance paid for from tax-exempt savings and no VAT on any of it – this is a cocktail of tax benefits that will be having advisors and providers offering advice salivating.
Here is LV’s David Stephens luxuriating in the success of his company’s lobbying
“The Government is absolutely right to allow people to access money from their pension pot to pay for advice and it’s positive this reform covers both traditional and robo-advice to meet consumers’ changing habits.
“We know that the upfront cost of advice can be a major barrier for consumers and today’s announcement should ensure that more people can get the help and support they need. Professional financial advice is vital for retirement planning to help people make the right decisions for them and ensure consumers get the most from their hard-earned savings.”
This is just so wrong.
The only reason that advice is needed is because of the complexity of the tax-system and the intricacy of the products needed to properly exercise pension freedoms. The reason that these products are so intricate is because they have to set individual retirement strategies for each policyholder.
The Treasury, who are behind this, have very little interest in insuring against old age, they have very little interest in pensions. They are interested in “ensuring consumers et the most from their hard-earned savings” – in short – wealth management.
The “industry” has blocked attempts to simplify these choices by encouraging default retirement strategies , using collectives that pool assets and longevity. Ros Altmann – in cahoots with the Treasury did for pot follows member and CDC only months after the Pensions Act 2015 had introduced them
Now the advisory lobby has convinced the Treasury that because Pension Freedoms have made spending our pots high maintenance, we should get tax subsidies to spend those pots on advice. The circle is complete and once again pensions are the losers.
Their recent info-graphic which sees retirement as entirely a matter of tax incentivised savings plans illustrates this well.
It now appears that the pension pot is, to a greater or lesser degree, a funding vehicle for the wealth managers.
The Treasury says:
“The scope of the allowance reflects the fact that it is not possible to make decisions about pensions in isolation from other aspects of an individual’s finances.”
The Treasury’s consultation response confirms the mechanism by which the allowance will be facilitated, that once the customer asks for it “the provider reduces the value of the client’s pension fund by the amount of the advice fee, and transfers these funds directly to that client’s adviser.”
In practice, the Treasury will be extending the “advisor charging” regime and formalising commission through the back door. I see few ordinary people having any need to pay an adviser £500 to be told their options, I see opportunities for unscrupulous advisers to offer cashback from “unused advice” as a means of pension liberation.
These are not victimless tax-giveaways
Though the tax-breaks are about retirement planning, they do not cover advice on defined benefit schemes. There are two types of DB schemes- occupational pensions and state pensions. These are excluded.
It may even be possible, through newly tax incentivised de-risking exercises, to dismantle DB schemes at little or no pain to the consumer!
The cost of the tax-breaks (I have still to see the government analysis on this – but it could be substantial) will be met from another budget. My suspicion is that it will be met from the existing budget for Pensions Wise, TPAS, MAS and CAB. In short – Peter will be robbed to pay Paul. Peter is the person with no advice budget, Paul has the wealth and the tax bill to mitigate. Paul doesn’t do Citizen’s Advice, he has too much money for that.
We have yet to see what the new Pensions Wise will look like, but I suspect it will be diminished to pay for these tax subsidies.
As these tax-breaks are principally targeted at those with wealth, this move looks like a move to protect financial advisers and the providers that depend on them, at the expense of those who do not need advice, especially those dependent on state benefits.
I can hardly think of a more regressive move. If this is the solution to the Financial Advice and Market Review it is a shabby one and one that I am bitterly opposed to.