Pensions Advice Allowance gives £1,500 tax break for pension planning

7 Feb 2017

People planning their retirement will be able to take out up to £1,500 tax free from their pension pots, in three stages, to pay for financial advice and any withdrawal will not affect the current employer-provided pension advice

The new Pension Advice Allowance will allow people to withdraw £500 on up to three occasions from their pension pots tax-free to put towards the cost of pensions and retirement advice from April 2017.

It is designed to increase the accessibility and affordability of financial advice about retirement by making advice more affordable due to the tax relief measure.

The tax-free move means that individuals will no longer risk a potential 55% tax liability over advice taken. Under the current tax rules, using this method to pay for holistic retirement advice on all of an individual’s pension products is treated as an unauthorised payment and can incur a tax charge of at least 55%. This is because, currently, the advice given must only relate to the pension product the advice fee is taken from.

Following an eight-week consultation on the plans, first proposed in the FCA’s Financial Advice Market Review and outlined in Autumn Statement 2016, the Treasury has confirmed the details for use of the £500 allowance:

it can be used up to three times, but only once in a tax year, allowing people to access retirement advice at different stages of their lives, for example when first choosing pension or just prior to retirement;
can be redeemed against the cost of regulated financial advice, including ‘robo advice’ as well as traditional face-to-face advice;
will be available to holders of ‘defined contribution’ pensions and hybrid pensions with a defined contribution element;
not eligible for holders of ‘defined benefit’ or final salary type schemes;
there will be no maximum or minimum age limit on the allowance; and
no limit on use of the allowance, regardless of individual’s income for that tax year.

The allowance will exclude advice that is not ‘strictly related to retirement’, for example inheritance tax planning or advice linked to investment funds that will not be used for retirement income.

Pension providers will be able to offer the allowance to their members from April 2017.

There will be no statutory obligation for pension providers to tell their customers about the entitlement, although the government says it will 'encourage providers and trustees to make clients aware of the allowance, but is not intending to place a statutory requirement on providers'.

Despite calls for an increase to the £500 figure from a number of stakeholder responses, the government will not raise the one-off limit, although it ‘acknowledges respondents’ concerns that £500 is not likely to be sufficient to cover the costs of a full, face-to-face holistic retirement advice process,' stating that 'it would be counterproductive to adopt a higher limit for the Pensions Advice Allowance which may discourage advice providers from offering their services for less than £500’.

The government will keep this figure under review as the advice market responds to the new advisory requirements.

Although there will not be any official VAT exemption for the advice provided since this is set at EU level, it is worth noting that the financial advice is exempt from VAT if it forms part of the ‘intermediation’ by the adviser between their client and the provider of a VAT exempt financial product.

To qualify for exemption from VAT, the adviser needs to evidence that there has been interaction between the adviser and the product provider in relation to the sale of VAT exempt products on behalf of the customer. (See HMRC VAT finance manual guidance)

How it works alongside employer arranged pensions advice

The new allowance will work in conjunction with the tax exemption for employer arranged pensions advice, which is set to rise to £500. The new income tax exemption, effective from 6 April 2017, will cover the first £500 worth of pensions advice provided to an employee in a tax year, an increase on the current capped £150 per employee per year. This tax exemption will be available for salary sacrifice arrangements between an employer and employee (see HMRC guidance on the tax exemption for employer-arranged pensions advice ). Legislation in Finance Bill 2017 will introduce a new exemption into Part 4 of the Income Tax (Earnings and Pensions) Act 2003.