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New rules allow you to take £500 from retirement savings to help fund the services of an expert

Investors planning for a secure retirement face a complex financial maze of often baffling jargon, tax rules and investment options.

While some will feel confident enough to navigate a safe path solo, many could benefit from speaking to a UK regulated financial adviser.

Research by Unbiased, a UK-wide adviser directory, found individuals who seek retirement advice increase their retirement savings by on average £98 a month. However, less than a third of people have accessed financial advice on their pension, according to the Treasury.

This so-called advice gap has prompted the Government to create a new tax-free allowance designed to boost the take-up
of advice.

How does it work?

The Treasury last week confirmed how the new advice allowance will work. From April 2017, you will be able to take up to £500 once-a-year from your pension pot, at any age, to pay towards regulated financial ‘retirement advice’.

This covers a wide range of scenarios, including advice on:

• how to draw an income for retirement from all of your pension pots, and from a stocks and shares ISA;

• whether income from a pension will be sufficient for your retirement, or whether you may want to supplement this income by releasing equity from your house;

• whether the asset allocation of a drawdown product is appropriate;

• how to use assets to fund care in old age.

You will be able to use the tax-free allowance up to three times and the money will be paid directly from your pension scheme to the adviser.

The allowance will only be available to those with defined contribution or ‘hybrid’ pensions, so if you have a final salary pension you won’t be able to use it.

You will need to speak to your pension provider to find out if the allowance will be made available to you from April this year because it is not compulsory for them to offer it.

Only you can decide whether it’s worth your while paying for financial advice, but the £500 allowance is unlikely to cover the total cost. While the Government hopes cheaper technology-based ‘robo advice’ services will in time develop, this industry is embryonic at best in the UK.

If you want a full, holistic financial plan you’ll need to go to a human adviser and, in all likelihood, £500 won’t be enough. According to the Treasury, 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.

Furthermore, remember this is not free money – your pension will be reduced by £500, plus any growth that money would have enjoyed, although the value added by advice often exceeds the cost.

Tom Selby,
Senior Analyst, AJ Bell

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