Tax-free pension advice won't close the advice gap
THE Government have announced that people will soon be able to withdraw £500 from their pensions tax-free if they use that money to get financial advice.
From April 2017, under-55s will be able to take the sum from their pots as part of an effort to ensure they fully prepare themselves for their retirement.
At the same, the Government will also be raising the tax exemption for employer-arranged pension advice from £150 to £500. Together, these two measures will enable people to use £1,000 of their pension funds without paying tax.
This is a positive move on the part of the Government, who are seeking to ensure that more people can and do access financial advice services. However, the Financial Conduct Authority's (FCA) own research on the "advice gap" suggests that those who most need advice are precisely those who'll be least likely to receive it.
For example, the Financial Advice Market Review (FAMR) published this March by the FCA found that a growing number of firms are refusing to give advice to customers with pension pots below certain levels.
It reported that, over the past 12 months, the proportion of financial institutions and companies who demand a portfolio of at least £100,000 has risen from 13% in 2013 to 32% in 2015.
Likewise, it also noted that 45% of firms hardly ever sell financial advice to customers with less than £30,000 to invest, while 69% of financial advisers had turned away potential clients in the 12 months prior to the report's publication.
This isn't so much because said customers can't afford advice, but because firms would make too little money from these customers relative to the costs of working with them.
It's because of this that, no matter how good a tax-free withdrawal of £500 or £1,000 may look on paper, it may be of little help to someone whose pension is below a particular threshold.
It may also be of little help insofar as no firm is legally obliged to provide any advice under the terms of this new Government initiative, leaving the least affluent pensions holders with little guarantee that they can actually benefit from it.
Even if firms are prepared to take on customers with smaller pots, £500 may very well prove too little to pay for many advisory services.
The minimum charge for retirement advice at Hargreaves Lansdown, for instance, is £495 (not including VAT). This entitles customers to a single consultation with an adviser and a report outlining several recommendations, and would be sufficient for their needs only if theirs were a simple case.
Meanwhile, the FCA state that face-to-face advice costs on average £150 per hour, so that those needing the "typical" nine hours with their adviser would find their bill running up to £1,350.
This means that many who are affected by the advice gap may not actually be able to take advantage of the new measures the Government are implementing.
The FAMR also observed that many aren't all that inclined to do so because they don't trust financial companies and institutions.
It cited a 2015 survey by Mintel which discovered that less than 50% of people trust financial advisers to act in the best interests of their customers. Even worse, it mentioned a similar survey by PricewaterhouseCoopers from 2014 which put this proportion at 28%.
Clearly, the problem in bridging the advice gap isn't simply the absence of a tax-exempt withdrawal. It's also the poor reputation of the financial sector and the divide many people feel between themselves and this sector. This is a big part of the reason why 47% of customers haven't received any kind of financial advice in the past three years.
Then there's the question of demand, which the FAMR's Call for Input uncovered was distinctly low among certain sections of the population.
For those with a pension fund of £50,000, 62% would be interested in receiving advice. By contrast, only 27% of people would be interested in advice with a pot worth £10,000.
The irony of this is that those who've been able to save only £10,000 would arguably be more in need of advice than anyone else.
Once again, it's tempting to put this lack of demand partly down to a lack of trust. In turn, this lack of trust itself partly stems from the financial crisis of 2008 and the various banking scandals that followed it. Because of this crisis and these scandals, the financial sector remains the least trusted industry in the world, despite rising from a low of 43% in 2012 to 51% today.
Given these alarming deficits in trust, it becomes necessary to acknowledge that it's not enough simply to offer a tax-free withdrawal of £500 to people in order to plug the advice gap.
What's also needed is a way of changing their views and the economic environment they inhabit, so that they're more likely to want to approach pensions providers and financial service firms with requests for advice.
However, since this would involve the massive task of changing the financial industry in such a way as to make it more trustworthy, it's hard to see how exactly the gap will be sealed anytime soon.
£50,000 or more
Nonetheless, for those who have enough in their pension kitty to motivate advisers to work with them, the Government's new measures will be welcome.
For one, they'll allow people to use the new £500 tax-free withdrawal for advice on any financial product that will contribute towards their retirement income.
What's more, as mentioned above, they'll be able to combine this with a higher tax exempt amount of £500 for employer-financed advice.
With this combined total of £1,000, more people will be incentivised to seek out a financial adviser, as indicated by the FCA research which found that 62% of savers would be interested in receiving advice if they had a fund of £50,000 or more.
Added to free Government guidance services like Pension Wise, such provision may be enough to combat some of the financial illiteracy that currently affects the UK population.
Just don't expect it to come close to reducing the advice gap completely.