Government Launches New £1,500 Tax-Free Pension Allowance
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Let’s look at some of the key questions:
What is the Pension Advice Allowance?
It’s a new tax break introduced by the government in April 2017. Normally, the funds in a pension can’t be touched until the age of 55 without incurring a 55% tax charge penalty. This new allowance permits anyone to take out up to £1,500 from their pension to pay for pension and retirement advice. The allowance can be used at any age – it’s not just for those approaching retirement. The maximum permitted is £500 in any single year. This can be done three times in total, giving a total amount to spend on advice of £1,500. Remember that this is completely tax-free and most people have had extra tax-relief on their pension contributions so it’s a real benefit.
Why has it been introduced?
It has been well known for a long time that too few people take financial advice and even fewer really understand their pensions and the options available to them. This can be really damaging in later life and lead to poor outcomes for pensioners. Taking advice can sometimes be the difference between having a comfortable retirement and struggling financially.
Research from Unbiased shows that only 22% of people approaching retirement know the value of their pensions and just 14% say they would be confident planning their retirement strategy without professional financial advice. Studies have shown that people employing a financial planner tend to save significantly more for their retirement and accumulate significantly larger pension pots than those who do not. They also tend to make more informed and better decisions when it comes to planning their retirement income strategy and investing their money.
For these reasons, the government is keen to close the ‘advice gap’. In other words, making financial advice to more accessible to more people. This new tax break is one measure to help a greater number of people afford and take up financial advice, specifically aimed at pensions and retirement planning.
How much money does it save?
Taking the full £1,500 tax-free sum (in three instalments) from a pension will save a higher rate income tax payer a total of £600. A basic rate income tax payer would save £300. A non-tax payer would not make a tax saving.
Who can use the allowance?
Anyone with a ‘defined contribution’ pension can take advantage of this new allowance. It’s not just for those approaching retirement. Younger people may choose to use it to get a pension review and ensure they are on track for a comfortable retirement. Older people approaching retirement could use it to get advice on pension income options like drawdown, annuity purchase or broader retirement strategy planning.
Will using this allowance reduce my 25% tax-free pension sum?
No. This is completely separate from the 25% tax-free cash you are allowed to take from most pensions when you retire.
Can’t I already pay for advice through my pension?
Many pensions do allow ‘adviser charging’ meaning your financial planner can be paid directly from your pension. However, not all pension providers offer this. In addition, these payments are only permitted for the specific pension product you are being advised on (such as pension transfer), and can’t currently cover broader retirement planning advice. If you want help and advice on a retirement strategy that might not be specifically related to a particular product, this new allowance could come in handy and save you money.
So all pension providers have to offer it?
No. The majority are likely to offer this allowance but it’s not compulsory. Some older ‘legacy’ pension providers may not offer this option. This is another reason to consider the appropriateness of old pensions schemes and to take this into account when you next review your pensions.
What can it be used for?
The allowance can be used for any pension or retirement advice. This might include a pension review, retirement income strategy, broader retirement strategy or any other financial advice connected with pensions and retirement.
What goes £500 actually get me?
Many financial planners will charge considerably more than £500 for a comprehensive pension review or retirement strategy advice.
Here at NorthStar, we are able to offer a comprehensive ‘Retirement Strategy Report’ for just £600 so this new allowance will almost cover this. This will set out your key objectives, our advice and recommendations and the steps to implement. This is particularly popular with younger clients looking for a strategy to help them invest for the long-term to get their pensions on track. It can also be used close to the point of retirement. For older clients, our ‘Retirement Strategy Report’ will set out the best way to invest for ‘drawdown’ or whether (and how) to purchase an annuity. It also shows the total likely retirement income achievable and ways to secure the best standard of living possible.
Remember that each £500 allowance can be put towards the cost of advice – it doesn’t need to cover the full bill. So if the advice you require costs more, it’s still worth using it get the tax break.
If you would like more information of the Pension Advice Allowance or want to chat about your current pensions or broader retirement strategy, get in touch.