The allowance is intended to enable individuals to receive advice on all the financial products that contribute towards their retirement income, such as multiple pension pots and other assets like ISA savings.

The Treasury says research shows that when approaching retirement only 22% of people know the value of their pension pot and only 14% of people would be confident planning their retirement goals without financial advice.

Simon Kirby, economic secretary to the Treasury, said: ‘The new allowance goes further than the current provision which only allows people to get advice on the pension pot from which the advice fee is taken. It will help people with the upfront cost of advice and allow them an opportunity to consider their retirement plans carefully in advance of taking their pension.’

For £500 consumers could use an online advice model that provides a personalised retirement plan or put the money towards the cost of face to face advice.

The tax-free amount would be in addition to the tax free lump sum available when benefits are ultimately taken.

The allowance would be available before the age of 55, and the consultation invites comments on the exact age from which it should be available, as well as whether to allow multiple uses of the allowance to enable individuals to get advice at different points of retirement.

The consultation sets out the government’s preferred approach to implementing the pensions advice allowance, which is to build on the existing adviser charging system. The Treasury says this would ensure that consumers benefit from the protections already in place in Financial Conduct Authority (FCA) rules and statutory restrictions, and limit burdens on firms.

Allowing people to use £500 from their defined contribution pension to redeem against holistic financial advice would require changes to the pension tax rules. To be an authorised payment, the funds would need to be paid direct from the scheme to the financial advisor.

The existing FCA charging rules and statutory restrictions on charges would apply to this authorised payment which would, essentially, be an ‘add on’ to the existing system. Any existing ways of facilitating adviser charging, for example for advice on an investment portfolio, would be unaffected.

The consultation also considers the position of vulnerable people, whether allowing multiple claims for the allowance increases the risk of fraud, and how to raise public awareness about the new allowance.

The Treasury says the new pensions advice allowance will be introduced at the same time as an increase in the tax exemption for employer arranged pensions advice from £150 to £500, which also removes a cliff edge that meant that if an employer spent more than £150 on advice, the whole amount became taxable.

It is possible that the tax exemption for employer arranged advice could be used in conjunction with the pensions advice allowance, to give people access to up to £1,000 of tax advantaged financial advice. Both measures are expected to come into force from April 2017.

The consultation closes on 25 October.

Introducing a Pensions Advice Allowance: consultation is here.