The announcement that the government is to tackle the advice gap by helping people to pay for advice from their pension savings is good news. According to the Treasury’s research, only 14% of the population would feel confident making financial decisions about their pension without expert advice. And there are two primary barriers to this – the affordability and the availability of advice.
The proposal allows people to take up to £500 of their pension savings tax-free to pay for advice in any single tax year. They are allowed do this up to three times.
Given the average cost of advice from a financial adviser is around £150 per hour and the general industry assessment is that 9 hours are required for a full pension assessment, £500 leaves those on lower incomes with a significant gap to plug to get advice. Also, as the average pension pot size in the UK is around £40,000, it is a hard sell to encourage people to surrender such a significant amount of their pension pot to buy advice.
However, the Treasury has cleverly included the right to withdraw the money to avail of automated advice systems, and here they have really got to grips with the problem.
Focusing solely on helping people to afford the cost ignores the fact that there aren’t sufficient advisers to provide advice on a wider scale in the UK. Currently, the number of independent advisers in the UK is c.25,000, which approximates to roughly 1 for every 2,500 adults. Even if each adviser can manage 200 clients each, that still leaves a huge gap.
Automating the provision of advice is the one surefire way to tackle the twin problems of advice availability and affordability. Robo advice can be provided cheaply and widely across the nation for a fraction of the cost of the provision of face-to-face advice.
It also can increase the ability of firms to deliver advice in a consistent fashion, while increasing both the firm’s and the regulator’s ability to audit the advice.
Automated advice systems will dominate future advice delivery, as the advice process is quite cumbersome but allowing people to engage with it at a time and place of their own choosing will help increase the take-up.
Advice is key to making the most of one’s savings in the complex world of financial services. For many people, their pension is the largest, if not the only, accumulation of wealth from a lifetime of work. Deciding what to do with their pension pot is a key decision and one that has consequences that will reverberate across the remainder of their life.
By encouraging the nascent field of robo-advice, the Treasury has acknowledged the problems with the current delivery of financial advice to lower-earners and is encouraging the industry towards the only sustainable solution – using technology to drive down the cost and increase the availability of financial advice.
The Key points:
• Can be used a total of three times, only once in a tax year, allowing people to access retirement advice at different stages of their lives, for example when first choosing pension or just prior to retirement
• Will be available at any age, allowing people of all ages to engage with retirement planning
• Can be redeemed against the cost of regulated financial advice, including ‘robo advice’ as well as traditional face-to-face advice
• Will be available to holders of “defined contribution” pensions and hybrid pensions with a defined contribution element, not “defined benefit” or final salary type schemes
• Possible to combine this £500 with a further £500 that employers will be able to spend on funding advice for their workers
• Payment of the allowance must be made direct from the pension scheme to the adviser. It does not pass into the saver’s hands.
• It is not mandatory for providers to offer the PAA.
If you are unsure how this will affect your organisation from a technical point of view, please contact us where we can give you some free and impartial advice.