Experts welcome Treasury proposals to allow tax-free draw-downs to fund financial advice

Oliver Gill
Follow Oliver
Bank Of England Proposes Switch To Polymer Banknotes
Over-55's could draw up to £500 tax-free under the proposals under consideration (Source: Getty)

With millions of workers being automatically enrolled into a workplace pension the Treasury launched a consultation to ensure that they are adequately advised in preparation for retirement.

The launch follows an announcement by the government in the March 2016 Budget to consult on recommendations by the Financial Advice Market Review (FAMR).

The FAMR proposals were to allow people to take a £500 tax-free lump sum from their pension pot before retirement to fund financial advice on how best to structure arrangements in the years to come.

Current rules allow £150 to be withdrawn but this attracts a tax charge.

"This is good news for consumers, extending the ways in which they can access professional help as they approach retirement," said Tom McPhail of Hargreaves Lansdown.

Some experts questioned whether £500 would be enough to cover all the costs but said it would at least be enough to get the ball rolling.

"While it would be a challenge to offer a comprehensive face to face advice service within the £500 limit, this amount should be an adequate level to assist people to identify realistic goals and show them how to start planning for themselves," said Fiona Tait of Royal London.

Read more: Experts slam Bank of England chief economist

Research indicates that many people only plan for retirement in the last two years of their working life and the consultation considers the idea of allowing the public to access the tax-free lump sum from the age of 55.

"By permitting access earlier, for example from age 55, the government may succeed in driving a behavioural change towards earlier engagement with retirement options," said McPhail.

Costs would be drawn directly from pension schemes by advisers and a key concern in the consultation is how to manage the risk of fraudsters exploiting this.

"There are various risks which will need to be guarded against, such as fraudsters targeting this new facility by pretending to be financial advisers, or investors splitting their pension into multiple small pots to strip all their money out in £500 tax free chunks with the help of an adviser," said McPhail.

Read more: Pension or property: Which is really better for your retirement?

The consultation advocated that only FCA regulated advisers could provide such a service.

However, Sarah Pennells of money website Savvywomen warned that fully mitigating this risk could be a challenge in the time available.

"The major concern is that fraudsters will have a field day and will be able to con people who are confused about the rules out of their pension savings. The government wants this allowance to be introduced next April, which doesn’t leave much time to get these details sorted," she said.

Related articles