£600 Tax Perk for Wealthier Pensioners

The Government has handed higher-rate taxpayers a tax perk by introducing the Pension Advice Allowance, giving them access to fee financial advice.

To be launched in April 2017, the move means that pension savers can take up to £1,500 out of their pension pot tax-free in order to pay for advice; higher-rate tax payers, who would normally pay 40% on any withdrawals from their pensions, will therefore effectively save £600.

However, although the total that can be withdrawn is £1500, the scheme’s rules allow pension savers to take out £500 at a time, up to three times, in order to pay for advice.

Speaking to the Telegraph, economic secretary to the Treasury, Simon Kirby, said the move is aimed at getting more people to take advice on their pension pot.

‘Pensions and savings decisions are some of the most important a person will make during their lifetime. This allowance will help people get the vital financial help they need to plan for their retirement,’ he said.

The withdrawal scheme is open to anyone, at any age, so it is not just for those nearing retirement and pension savers can take up to £500 on a maximum of three occasions, but they are only allowed one withdrawal under the Pension Advice Allowance in each tax year.

‘money can be used for traditional face-to-face advice or retirement planning, or it can be used to pay for online ‘robo-advice’’

The scheme is only open to those with a defined contribution pension, or with a hybrid pension with a defined contribution element; those with a defined benefit or ‘final salary’ scheme do not qualify.

Withdrawals from pensions are normally charged at the individual’s income tax rate, so without the scheme a higher rate tax payer would be taxed £600 for making three £500 withdrawals.

For a 20% tax payer, the benefit is 20% and those with income below the tax-free allowance of £11,000 would not have had to pay any tax on the withdrawal unless it took them over that limit.

The money can be used for traditional face-to-face advice or retirement planning, or it can be used to pay for online ‘robo-advice’, which uses technology and online systems to help individuals organise their finances.

Advice must be taken from a regulated entity – human or otherwise – and payment is made directly from the pension provider to the advice service rather than to the individual saver.

The Government’s definition of ‘retirement advice’ is ‘intended to include a consideration of other factors, including other assets, which are relevant to an individual’s retirement planning. The scope of the allowance reflects the fact that it is not possible to make decisions about pensions in isolation from other aspects of an individual’s finances.’

In taking account of a saver’s other financial affairs, advice will include how to draw an income from a pension, using a stocks and shares ISA as an alternative to a traditional pension, equity release, or how to fund later life care.

With face-to-face advice currently charged out at £150 per hour, the allowance is unlikely to cover the full cost of advice where the saver has complex arrangements; however robo-advice is likely to prove cheaper, although they are in the earlier stages of developing a pension proposition.