UK Pensions Advice Allowance – three is the magic number
Let’s start with the small print…
From April 2017 it will be possible for individuals to take regulated financial advice and to have up to £500 deducted from their defined contribution (DC) pension pot and paid over directly to a financial adviser. This is for regulated “retirement financial advice”, defined as “advice in respect of the person’s financial position, including their pension arrangements and the use of their pension funds”.
The pensions advice allowance (PAA) can be used by current and former members of any age, including those in receipt of a pension. An individual can use the PAA three times in their lifetime but not more than once in any tax year. The PAA will be an authorised payment for tax purposes and the Government says that it will not affect an individual’s ability to take up to 25% of the remaining funds as a tax free cash lump sum when the benefits are taken.
The advice does not have to be provided on a face to face basis.
Which pension plans are affected?
The PAA can be taken from any DC pension pot – including from additional voluntary contribution arrangements. Many defined benefit plans offer a money purchase AVC facility, so this new legislation affects most pension plans. However, it will only be available if the pension plan rules allow it.
From April 2017 the Government is also increasing the income tax exemption around employer-arranged pension advice from £150 to £500 where an employer pays for or reimburses the cost of the advice. The scope of the advice that can be provided will be wider than before and there is nothing to stop this being used in conjunction with the PAA so that the member can benefit from £1,000 of tax advantaged advice.
Considerations for trustees
Trustees of pension plans with DC pots should consider whether they wish to offer the PAA to members, seek advice on whether rule amendments are required and consider whether they will place any restrictions on it. Trustees may, for example, choose to limit the choice to a specific firm of financial advisers and perhaps seek a fee reduction for members at the same time. Trustees should also guard against advice scams by unscrupulous “advisors”, where members could be encouraged to agree to their DC pots being charged whilst not actually receiving valuable advice. The Pensions Regulator is expected to release a factsheet in the near future confirming that trustees will not generally be liable for advice given by a third party.
Individuals using the PAA will be required to declare that they have not used the PAA more than three times in total but trustees are still expected to operate basic due diligence to prevent misuse. For example, if an individual uses the allowance more than three times in relation to the same pension plan, trustees should either not execute the withdrawal of money or report it to HMRC as an unauthorised payment. This means that trustees will need to keep records of members using the PAA.
It is difficult to estimate how popular this option will be amongst members but we anticipate that financial advisers will publicise it as it is likely to generate business for them. Trustees should be prepared for questions in the short term and should add this issue to a forthcoming agenda for discussion.