Paying for financial advice: new allowance from April

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

A new provision to allow individuals to withdraw money tax-free from their pension savings to use towards retirement financial advice is due to come into force from 6 April 2017. A key point to note is that schemes will not be required to offer this.

In summary the allowance will be:

• up to £500 per use, with up to three uses in a lifetime (no more than one per tax year);

• available at any age;

• tax free regardless of income;

• only from DC pension savings (although this is not expressed in the draft regulations); and

• the payment must be made direct to a regulated financial adviser for regulated financial advice.

Retirement financial advice is wider than pure pensions advice and is intended to include consideration of other factors, including other assets owned by the individual. It may include advice on drawdown, sufficiency of income and funding care costs, but will not include IHT planning or advice on investment funds that will not be used for retirement. It is not entirely clear how retirement financial advice squares with the requirement for the advice to be regulated, as this is generally much narrower in scope.

The payments will be on a self-declaration basis but schemes will be expected to operate basic due diligence to ensure there is no misuse. Unauthorised payments will be subject to the usual 55% charge. There will not be a statutory override, so schemes which wish to offer this option may need to be amended in order for the allowance to be paid. Consideration will also be required as to how any charges or commissions relating to the retirement financial advice fit within the existing restrictions. It may be that individual member consents will be required.

The new allowance can be used alongside the tax exemption for employer-arranged advice. The current tax exemption for up to £150 of pensions advice paid for by an employer is expected to be increased to £500 and widened to include advice on pensions and related financial and tax issues. This change was announced in the 2016 Budget and is in the Finance Bill 2017.

The exemption will apply to up to £500 paid (or reimbursed) by the employer in relation to the provision of information or advice to an employee in connection with the person’s pension arrangements or use of their pension funds. The advice must either be:

• made available to employees generally (or employees at a specific location); or

• made available to employees generally (or employees at a specific location) who have reached age 50 (in most cases) or meet the ill-health condition.