What the £500 limit on tax-free financial advice will change

The process of saving into a corporate pension happens, for most people, automatically.

They do not need to opt in, the money is taken from their pay cheque and, for more than 85 per cent of people, the money is placed in the scheme’s default fund. In other words, the employee plays no active role in the process.

Developing alternatives to providing advice in the workplace will be a critical component of shifting the burden of retirement savings from the state to the individual

This has changed with the pensions freedoms. An employee will now have to make an active choice about what to do with their accumulated pension pot, whether that is to cash out, go into drawdown, annuitise or just keep it invested.

To date, people have had very few options to get advice. Firstly, employers are concerned about being perceived as giving or endorsing any type of advice in case it subsequently appears to be inappropriate and thus subject to charges of mis-selling.

Secondly, employers have been limited to providing up to £150 towards financial advice per employee. Anything above that figure is counted as a benefit and subject to tax.

The 2016 Budget has eased the restrictions on the second issue by increasing the figure an employer can contribute towards financial advice per employee from £150 to £500. Any figure below £500 does not incur tax as a benefit.

This is a welcome change but unlikely to be a game changer in the short term for several reasons.

Traditional advice

In most cases, £500 would only contribute about half the amount required for an employee to get an adequate retirement plan delivered by a traditional face-to-face adviser, such as an independent financial adviser.

Many employers will also be reluctant to provide £150, let alone £500, per employee to fund financial advice.

While auto-enrolment is very positive in increasing the amount of pension savings, it is an additional cost to employers that over time will rise to 3 per cent of band earnings.

Providing employees with an additional sum for financial advice will be an extra cost many employers will decide is too expensive.

Robo-advice

However, over the longer term the Budget changes might be beneficial, especially if combined with employers encouraging employees to become more engaged in understanding and involved with their pensions.

For example, we are increasingly seeing the development of cheaper, technology-powered forms of advice and guidance.

Generically described as 'robo-advice', these solutions use algorithms to determine the best investment course for an individual.

It is expected that for simpler needs these robo solutions could be provided to an individual for as little as £100 to £200.

While retirement decisions are more complex, and 'robo' does not provide the personal hand-holding many individuals seek, these technology solutions mean many employees should be able to find the guidance and advice they need within the £500 limit.

An employer could encourage access to such solutions, which would be provided independently by a third party, thereby mitigating the employer’s liability.

Pension pot could cover advice cost

The government has posited another solution if employers are not willing to fund advice: to allow employees to withdraw up to £500 from their pension pot without suffering a tax charge, if that money is used for retirement advice.

At this point it is only a proposal, but provides a potential means of funding advice.

In general, developing alternatives to providing advice in the workplace will be a critical component of shifting the burden of retirement from the state to the individual and enhancing the financial literacy of the population.

This year’s Budget is a tentative first step in the right direction, but will only have the desired effect if employers, working with the financial services sector, can develop lower-cost advice solutions suitable for the vast majority of employees.

Andrew Power is investment management partner at consultancy Deloitte