Pension specialist Fiona Tait gives an update on three big announcements from the 2016 Budget – Pensions Advice Allowance (PAA), the Lifetime ISA (LISA) and the pension dashboard.
£500 Pensions Advice Allowance
Under current rules it is possible to deduct an adviser charge from a defined contribution pension fund to pay for financial advice, but this is limited to advice directly relating to that product, otherwise it becomes an unauthorised payment.
HM Treasury is proposing that an amount of £500 should be deductible for holistic financial advice covering not just that product but other retirement advice issues for that individual. This is significant because many legacy products do not have an adviser charge facility but more modern contracts could then be used to fund the full process. It could also potentially be combined with tax-exempt employer funded advice of up to a further £500.
The final changes are expected to come into force in April 2017. In the meantime responses to the consultation are requested by noon on Wednesday 26 October, either in writing or via email. As ever we encourage advisers to make their views known.
We need to manage expectations. It would be foolish to suggest that this allowance could solve the advice gap all on its own but it has to be positive if more people engage with financial advice. £500 will not pay for a full face-to-face advice service but it can be used to offset the cost, or to offer technology-led service which helps people to help themselves. Promisingly, recent Royal London research with people aged 35-44 found that 87 per cent of those who had taken financial advice said they would be likely to do so again in the future.
There is also a fair amount of detail to come, regarding exactly how “retirement advice” is to be defined and how deductions will be applied to plans with guaranteed benefits. The PAA is only intended to apply to defined contribution arrangements and is it not expected to be a mandatory requirement for defined benefit schemes. While we would expect providers to offer it where they can it is unlikely to be introduced into older plans without further incentive.
The proposal is framed in the context of pension freedoms and the wide range of options available to pension savers from age 55, however HMT agrees with the suggestion from the Financial Advice Market Review (FAMR) that withdrawals to pay for advice should be allowed before this age. Royal London believes this is essential in order to help people to understand how much they need to save to have enough to have sufficient pension options in the first place. We also support the possibility of multiple uses, perhaps linked to key ages or life events.
Finally, Royal London believes the allowance should only be available for fully regulated advice, not guidance. We applaud the work of the current guidance services, however the risk of pension liberation and scams remains high and limiting the allowance to regulated financial advisers would mean only those who are registered, and overseen by, the FCA would qualify.
The Lifetime ISA
HMT issued a technical note outlining the proposed design of the Lifetime ISA in March. The updated note adds some welcome detail and confirms two significant changes:
- With the exception of transfers from Help to Buy ISAs (HISAs) all contributions must sit within the LISA annual allowance of £4,000. Prior to this announcement there had been confusion as to whether savings up to the total ISA allowance of £20,000 could be held with a LISA, albeit with only £4,000 attracting a Government bonus.
- From 2018 the Government’s 25 per cent bonus will be reclaimed monthly instead of annually. This will mean that qualifying withdrawals made part-way through the year will still benefit from a proportion of the bonus.
The Lifetime ISA is being legislated for through the Savings (Government Contributions) Bill, which was introduced to Parliament on Tuesday 6 September, and is expected to be available from April 2017.
There are still some questions to be answered around the consumer protection aspect of the LISA before we make any final decisions on our offering. It does however seem likely that it will appeal to pension providers as a complementary long-term savings vehicle which will benefit from the experience and existing capabilities they have to offer. Once more detail is provided by the Treasury we expect more providers to confirm whether they will offer a Lifetime ISA in future.
The requirement to collect the Government bonus on a monthly basis from 2018-19 will create slightly greater administrative complexity, but it is clearly in consumer interests. We also hope that the Financial Conduct Authority (FCA)’s consultation will result in consumer protection standards equal to those applicable to pensions, particularly in relation to charges.
We agree that there should be some disincentive to take early withdrawals (although we do not consider 5 per cent to be a “small additional charge”) but also ask the FCA to consider the level of ongoing charges which are in general higher than for pensions.
The decision to go for simplicity is very welcome. Allowing ISA, or other transfers, above the £4,000 annual allowance would have been extremely complicated, necessitating separate accounts for LISA and non-LISA funds. Limiting penalty-free withdrawals to first house purchase, terminal illness or after age 60, at least at the outset, is also sensible. Borrowing in special circumstances is allowed in other countries and is worthy of consideration, however if it is to be permitted we would urge the government to keep the rules as simple as possible.
We have a definite date! HMT has announced that a prototype dashboard will be available from spring 2017. The Association of British Insurers (ABI) has agreed to manage the project and will be supported by 11 product providers, including Royal London.
The aim is for consumers to be able to access information about all their pensions savings in one place for the first time, and HMT believes it could help release the £400m-worth of pensions savings which the Department for Work and Pension estimate are currently unclaimed.
March 2017 – ish (BUT see below)
The announcement states that a “prototype” will be available. This is NOT the final dashboard. The spring 2017 dashboard will be designed to test agreed standards and architecture, but there will not be a version accessible to the public at this stage. By 2019 the Government intends that there will be a publicly available dashboard, which is expected to include state pensions and some DC pensions, particularly those under automatic enrolment. However, as there is no legal duty on schemes or providers at present to participate, it is highly unlikely that the 2019 dashboard will give a comprehensive picture.
Any progress and commitment to action is of course very positive, but once again consumer expectations need to be carefully managed. Royal London is fully committed to the pension dashboard working groups and will do all we can to ensure the dashboard is delivered as soon as possible.
Creating the pensions dashboard will require a lot of work, getting different pensions providers together to build a system that can handle the many types of pensions we have in the UK is no easy task. But it is worth doing! Some of the functionality and data requirements are already in place but this will have to be expanded to all pension scheme providers and all contracts, including state benefits.
Despite the clear-out of previous ministers and rumours of different priorities for the moment at least it seems to be following the existing plan. Either that or they’re clearing the decks…