The government is set to introduce two tax-saving “mechanisms” into legislation, both of which will apply from April 2017
Auto-enrolment has increased the number of people saving into pension schemes – there is no doubt about that. This has meant that people have to understand a pension and savings landscape that is a mystery to many. Added to this is the pension flexibilities that were introduced from April 2015, which can be equally confusing for the uneducated and misinformed.
In recognition that individuals will need pension advice, the government is set to introduce two tax-saving “mechanisms” into legislation, both of which will apply from April 2017. Despite their similarity and the overall outcome of better informing the individual, they are not the same thing:
Employer-arranged pension advice
Currently, there is an income tax and National Insurance contribution (NICs) exemption on employer-arranged pension advice. This exemption is contained in the Income Tax (Exemption of Minor Benefits) Regulations 2002 and was effective from tax year 2005-06. The UK-wide exemption means that if the employer arranges and pays for this advice, it is not treated as a benefit in kind if the value is £150 or less. It is not an allowance. If the cost of the advice is over £150 and paid by the employer, the whole amount is subject to tax and NICs (Class 1A).
Budget 2016 announced that the £150 exemption is to be increased to £500 from April 2017. This was following a recommendation by the Financial Advice Market Review in March 2016 that said the government needed to “explore ways to improve the existing £150 income tax and National Insurance exemption for employer-arranged advice on pensions”.
Further, the £500 will, effectively, become an allowance-type arrangement whereby this can be offset against the total cost of employer-arranged and funded advice. Therefore, the first £500 of any advice will be eligible for tax and NICs relief rather than the current position where the whole amount becomes taxable and NI’able if it exceeds the value.
Pensions Advice Allowance
This is not the same as the above.
Budget 2016 also announced that it would consult on a “Pensions Advice Allowance”, also to the value of £500. This was following a recommendation in the same Financial Advice Market Review (FAMR) report that an individual should receive a “pre-retirement advice tax break”.
Before the age of 55, an individual will be able to withdraw up to £500 free of tax implications from a defined contribution (DC) pension pot to be used against any payment for financial advice. This £500 value is in addition to the existing lump-sum tax-free exemption when benefits are eventually taken.
The Pensions Advice Allowance is the subject of a current consultation, asking 17 questions such as:
• How widely are the current provisions for facilitated adviser charging used?
• How should the Pensions Advice Allowance work?
• How many times should the Pensions Advice Allowance be available to an individual?
• What age should the allowance be available from (considering that the FAMR only said it should be before the age of 55)?
• How could the allowance be communicated and publicised (considering that one of the options is to use employers)?
• Are there “vulnerable” people that could be impacted by the new allowance?
• Should it only be available for people with DC pots or for people with a combination of DC and defined benefits pots?
• How does the government mitigate the risk of fraudulent use of the Allowance?
It is important to differentiate between the two tax-free breaks – a change to the existing one and the new one that will be available from April 2017.
The Pensions Advice Allowance seems to be a temporary and ill-advised solution to the major issue which is that pension advice needs to come much earlier in an individual’s savings life – say from the age of 16. I also wonder where this allowance will apply, as the consultation makes reference to the Equality Act 2010 which only applies in Great Britain – has Northern Ireland been forgotten? Plus, shouldn’t the government be focusing its attention on promoting good savings products in the first place rather than installing a new tax break at a time when there is probably little time to redeem a poor savings choice?
The consultation closes on Tuesday 25 October 2016, and look out for the legislation that will form part of Finance Bill 2017.