Will you be forced to pay for pension advice?

Older couple receiving advice © iStock
Taking advice may be wise, but it’s costly

Thousands of pension savers will avoid having to pay for mandatory financial advice following a government initiative aimed at those who have guaranteed annuity rates (GARs) on small pots of retirement cash. While ministers are anxious to ensure poorly informed or advised savers do not lose out in retirement, they believe the cost of advice may be disproportionate for those with relatively small pension funds.

Some 1.5 million people have personal pensions with GARs attached. Unlike conventional pensions, where savers must take their chances with the prevailing market annuity rates at the time when they convert their savings into regular pension income, a GAR promises a fixed rate. Almost all such plans were set up decades ago at a time when rates were generally much higher than those which are available in today’s annuity market, where rates have plunged in recent times because of falling interest rates and gilt yields. They therefore offer significantly higher pension incomes than savers would get if their savings were held in a conventional arrangement.

For this reason, pension regulators are keen to ensure savers with GARs think carefully before taking advantage of the pensions freedom reforms introduced two years ago. Those cashing in their savings, or transferring the money to an alternative arrangement, could miss out on substantial value by giving up their guaranteed annuities.

However, while new rules due to come into force next April will require most savers planning on doing this to get independent financial advice before taking action, ministers have now said those with small amounts of savings will be exempt from this requirement. Instead, GAR holders considering moving pension pots worth less than £30,000 will be sent a “personalised risk warning”, setting out the value of their savings and the benefits they would be giving up by transferring elsewhere.

The arrangement mirrors the regime that applies to savers with money invested in company final-salary pension schemes offering guaranteed levels of retirement income; those considering transferring out of such a scheme are also typically required to pay for independent financial advice, but this rule does not apply to funds worth less than £30,000. In the case of GARs, ministers argue that the cost of taking financial advice on a transfer is at least £900 and can sometimes be considerably higher – on the smallest pension pots, such charges look poor value relative to the amount of benefits at stake.

As many as 12,000 people a year will benefit from the move to exempt small pension pots from the rules on compulsory financial advice, estimates the government. The personalised risk warning requirement will also mean that all savers in this position will receive better information about the benefits they are entitled to. Some savers have complained that their pension providers currently offer very little detailed information on their entitlements, effectively forcing them to pay for advice.

A related problem is that many financial advisers are reluctant to offer advice on more finely balanced pension-planning issues, including transfers out of final-salary schemes and plans with GARs for fear of potential compliance challenges in the future. Many savers therefore struggle to get the advice they need, with those who have smaller sums finding this particularly difficult.

Pension Tracing Service receives millionth request

More than a million people have now used a free government service to track down lost pension savings, new figures from the Department for Work and Pensions (DWP) reveal. The Pension Tracing Service received its millionth request earlier this month, just over a year since its launch in May 2016, said the DWP.

The service has links to more than 320,000 pension-scheme administrators and can search for forgotten pensions using the name of a past employer or pension provider. While the service can’t tell inquirers whether they have a pension or what it’s worth, it locates the correct contact details to enable savers to track down lost plans.

However, pension experts hope the service will eventually be rendered redundant with the launch of pensions dashboards – a new digital account where savers would be able to find details of all their pensions in a single online location. The pension industry has promised the government it will have dashboards up and running by April 2019, with early versions already in testing. But for now, the Pension Tracing Service provides a useful resource for savers concerned about forgotten pensions. Call 0345-6002 537 or see Gov.uk/find-pension-contact-details. If you are already in retirement, you may even be able to negotiate a higher pension income to compensate you for benefits on which you have missed out by not claiming sooner.

Tax tip of the week

If you are a landlord, you can deduct allowable expenses from your rental income when working out your taxable rental profit. Common types of expenses that can be deducted include general maintenance and repairs (but not improvements, such as replacing a laminate kitchen worktop with a granite one), insurance premiums, and accountant’s fees, says HMRC.

Generally, you cannot claim “capital expenses” for a property – this label applies to expenses that will be used in the business over a longer period of time, such as when you add something to the property that wasn’t there before, or buy furniture and equipment for the property (though you might be able to set these expenses against capital gains tax in the future).