You could soon be able to dip into your pension in order to pay for financial advice – so long as the government listens to recommendations from the Financial Conduct Authority.
The measure would go some way to addressing the City regulator’s ‘current concerns about the affordability and accessibility of financial advice and guidance’, it said yesterday in its latest market review.
The FCA didn’t put a figure on how much cash it thinks you should be able to get your hands on to pay for advice, instead it stated it was calling on the government ‘to allow consumers to access a small part of their pension pot’ to redeem against the cost of pre-retirement advice specifically.
‘This will ensure that consumers can access financial advice at a key milestone in their lives and feel confident in making financial decisions as they approach retirement.’
The need for financial advice is clear. Since last April, retirees have been given the green light to do as they please with their pensions.
Before then they were restricted to withdrawing a 25 per cent tax-free lump sum and then choosing between purchasing an annuity – a form of insurance policy that pays a guaranteed income for life – or entering into an income drawdown arrangement whereby the remainder of the pension stayed invested but paid regular income.
The problem was annuities largely proved pretty shoddy value for money and income drawdown was only an option for those with significant sums invested to generate a substantial minimum income threshold.
However, the arrival of ‘pension freedoms’ last April means retirees can now choose to withdraw every last penny should they so wish – with tax charged at their marginal rate on three quarters of it. They can still choose to buy an annuity or go into income drawdown but there’s now a much lower minimum income requirement.
‘This will ensure that consumers can access financial advice at a key milestone in their lives’
As well as the complexity of retirement planning, by giving access to pension money to pay for fees, the FCA is hoping to bridge ‘the advice gap’ that has sprung up since the Retail Distribution Review did away with advisers getting paid by receiving commission from product providers. Instead, they started levying upfront fees on clients. The problem, of course, is that people don’t like paying for financial advice.
While they are prepared to pay a solicitor or an estate agent for assistance when buying or selling a property, for example, they find it much less agreeable to pay upfront for financial advice that may save or make them money in the future – both are intangible benefits at the point of payment. But going without advice can be the most expensive mistake of your life.
According to research by unbiased.co.uk and AXA Life Invest, individuals who take advice save on average £98 more every month. That may not sound much but it works out at £3,654 of extra income in every year of retirement (based on a pension pot of £100,000). Multiply the annual figure by 20 – which your retirement could easily span – and the difference becomes much more striking, at £73,080.
Yes there are lower cost alternatives to face to face financial advice on the market. For instance, you can bypass a human altogether, pull out your smartphone and let a ‘robo-adviser’ steer you into an investment portfolio based on a few details about your finances, objectives and attitude to risk. But while that may be appropriate in your thirties and forties when you’re still in the capital accumulation stage, chances are as you near retirement your circumstances and financial affairs will be far more complex and what you’ll really benefit from is in-depth advice and a bespoke investment strategy.
So well done to the FCA for proposing a mini pension raid to cover advice costs. Let’s just hope the Chancellor’s listening.
Laura Whitcombe is knowledge and product editor at ThisisMoney.co.uk.