Pension advice allowance explained

Ollie Bryden | 22/07/2019



Pensions aren’t always the easiest subject to get your head around, so expert advice is often essential if you want to make sure your retirement savings are working as hard as possible. Good advice comes at a cost, which is where the Pension Advice Allowance comes in. Here’s everything you need to know about how it works and who’s eligible.

What is the Pension Advice Allowance?

The Pension Advice Allowance was first unveiled in the 2016 Budget as a way of enabling people to use some of the funds from their pension pot to pay for advice, without being hit by a tax bill. It came into effect on 6 April 2017.

The Allowance is only available to members of defined contribution, which also known as money purchase pensions. With this type of scheme, the amount you’ll end up with at retirement depends on the contributions you’ve made, those of your employer (if it’s a company scheme), and investment returns.

However, not all pension providers offer the Pension Advice Allowance, so if you’re considering using it, check with yours to see if it does.

How does it work?

If your pension provider does offer the Pension Advice Allowance, you’ll be able to take up to £500 from your defined contribution pension up to three times in your lifetime. The funds can be redeemed against the cost of retirement financial advice.

This is so you can take advice at different stages of your life. For example, when you’re in your thirties or forties, you might want advice on where your retirement savings should be invested, whereas when you’re in your fifties or sixties, you may need advice on how to draw an income from your pension in retirement.

You can use the Pension Advice Allowance at any age, but only once in any tax year. It can only be used to pay for regulated retirement financial advice, so any adviser you choose must be regulated and authorised by the city regulator the Financial Conduct Authority (FCA).

However, legislation introduced in 2012 means you can take an unlimited amount from your pension in the event of a pension transfer. This means that the usefulness of this allowance, tends to be more for financial planning or retirement planning, where the advice isn’t to do with a switch of your pension.

Why does advice matter?

Many of us will spend decades in retirement, so it’s crucial that to find out whether your retirement savings are on track to provide you with the sort of lifestyle you want when you stop work. An adviser can help you work out if you’re paying in enough, and whether the funds your retirement savings are invested in are performing in line with your expectations. They can also suggest whether you might be better off switching your pension to reduce the charges you’re paying, or because you’ve got several plans which you’d like to consolidate.

Our blog on ‘The benefits of pension advice’ explains in more detail some of the different ways advice might help you get more from your pension pot. An adviser can also discuss the different ways you can take an income from your savings in retirement. You can find out more about your options at retirement in our blog ‘Accessing your pension’.

What about members of defined benefit or final salary pensions?

If you belong to a final salary or defined benefit pension scheme, you won’t be eligible for the Pension Advice Allowance. However, you must by law get independent financial advice if you have a final salary pension worth more than £30,000 and you want to transfer it to a defined contribution pension scheme.

With defined benefit pensions, the amount you’ll receive at retirement depends on how long you’ve belonged to the scheme and your salary. The amount you’ll get is guaranteed and will increase each year so that it keeps pace with rising living costs.

These benefits are extremely valuable and may mean you’ll receive a better retirement income than you can from other types of pension. This is why we don’t offer advice on final salary pensions.

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