The Pensions Advice Allowance, which is due to come into force from April 2017, will allow consumers planning their retirement to take up to £500 in three separate tax-years to put towards pension advice.

It will be available to holders of defined contribution (DC) pensions and hybrid pensions with a DC element, but it won’t be available for defined benefit (DB) or final salary type schemes.

But the £1,500 can be used against the cost of regulated robo-advice and traditional face-to-face advice.

The proposal for savers to be able to access an amount from their pension pots tax-free to put towards advice was first announced in March 2016 as part of the Financial Advice Market Review to plug the ‘advice gap’. Initially a one-off £500 advice allowance was proposed.

Research found that when approaching retirement only 22% of people knew the value of their pension pot and only 14% of people would be confident planning their retirement goals without financial advice.

Sponsored

How life insurance can benefit your health and wellbeing over the decades

Sponsored by Post Office

According to Unbiased, UK savers with a pension pot of £100,000 save an average of £98 more every month and receive an additional income of £3,654 every year of their retirement if they take financial advice.

Economic secretary to the Treasury, Simon Kirby, said: “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.”

‘Should help people avoid making poor decisions, and reduce scams’

Andrew Pennie, head of pathways at Intelligent Pensions, said this is a positive step and will make it easier and more desirable for more people to access regulated financial advice.

“Under pension freedoms, people have more choice and opportunity but that comes with greater complexity and risks. There is growing evidence people are making poor decisions at various stages of the retirement journey and personalised regulated advice is the most effective way to avoid these poor decisions and help people achieve better retirement outcomes.

“The additional advantages of FCA regulated advice is the regulatory protection it provides – if the advice is wrong and results in financial loss, an individual has the right to recourse. In addition, more people taking regulated advice should help cut down on the number of people falling victim to scams.”

Pennie added that £500 might not be enough to access a suitable advice service from all advisers and making it available to DB scheme would remove a barrier many DB holders currently face when trying to source the required pension transfer specialist advice.

“There is a cost for doing DB transfer analysis, irrespective of whether that passes or fails, but paying for that advice has been a barrier to some people progressing their enquiry, albeit only in a minority of cases,” he added.

Tom Selby, a senior analyst at AJ Bell, said while this is an improvement on the existing system, the industry needs to be realistic about what this will achieve.

“According to the Treasury’s own analysis, face-to-face advice costs £150 per hour on average, and can take up to nine hours for pensions – meaning even with the allowance you still might have to make up a shortfall of £850.

“The sector is clearly evolving and innovative ‘robo-advice’ models may develop to help people assess their retirement options. But we are some way from that point at the moment and the government should not see the advice allowance as some sort of panacea that will magically solve the UK’s advice gap,” he said.