History tells us the new pension advice allowance won’t plug the advice gap
Last week the proposed pension advice allowance took a step closer to becoming reality. The idea was first sounded out in the Budget but had to be reviewed by the Treasury and Financial Conduct Authority first. The idea is that consumers will be able to access £500 tax-free from their pension plans to pay for financial advice. This new pension advice allowance is aimed at plugging the advice gap that exists following the new pension freedoms introduced last year. The new pension advice allowance will come into force next April and the money can even be withdrawn before age 55 but has to be used towards the cost of regulated advice.
While many in the press got excited about the idea I can't help but think this scheme won't live up to its billing. Firstly it is ripe for exploitation and will serve to line the pockets of financial advisers, even if there are stringent rules surrounding its implementation. If we want to get a glimpse into how things might pan out we just need to look at another Government scheme, with well-meaning intentions, which provides cost effective access to private sector services. I'm referring to the free childcare scheme launched in 2010 which gives 15 hours of free childcare a week to all three and four-year-olds, funded by the taxpayer.
While the scheme has been successful in making childcare more affordable it does nothing to improve the services offered and provides a ready-made line of customers for nurseries to up-sell to. Nurseries cannot charge for the free childcare promised by the Government but they can ask parents to pay towards the cost of food and special activities. Yet nurseries use ever more creative methods to get around the rules and boost their profits. For example a nursery I used for my eldest daughter made their childcare sessions longer than could be covered by the Government's free childcare allowance which meant we had to stump up extra cash.
Now the Government is thinking about extending the free childcare scheme (offering up to 30 hours free childcare). However nurseries are threatening to pull out of offering places under the scheme because they claim it's underfunded.
If the behaviour of nurseries teaches us anything it is that when the pension advice allowance is launched financial advisers will find many ways to profit from the new wave of customers. Also don't be surprised if the service you receive is rather limited and you have to pay more to get the 'the full advice experience'. Trust me, £500 doesn't go very far in the world of financial advice. Yet even if the Government implements rules to limit profiteering there will always be ways around the regulations. The good news is that there are many decent IFAs out there that do not exploit consumers, however, if the £500 limit is not sufficient to cover the costs of their advice and administration they will simply not offer their services, much like the nurseries under the proposed free childcare scheme extension.
The other problem the new allowance faces is supply and demand. There is an overwhelming demand for affordable childcare with limited spaces available. In contrast the demand for financial advice is muted as consumers don't place value on the service. The Government has stoked the need for extra financial advice but it doesn't directly translate into new demand as many consumes will simply go it alone or cash in their pensions altogether.
The upshot is that you can't force people to take advice if they don't want to, especially if it means spending their own money to do so. If on the other hand the advice was free, and completely funded by the tax-payer like the childcare scheme, then the pension advice allowance would have more chance of succeeding. Yet pouring tax payers' money into the open pockets of the City isn't a good idea or a vote winner.
The childcare scheme works because it is free, consumers have to use childcare in order to work and put food on the table. None of these are true of the new scheme promoting financial advice. Consumers can survive without employing the services of an IFA, a service which most consumers don't value anyway. But why don't they value it? Financial advisers spent decades not having to prove the value of their services because they were paid commissions via the backdoor by product providers. The Retail Distribution Review (RDR) means that advisers now have to charge directly for their advice, usually via fees. The problem is that we have a generation of advisers who don't know how to show the value of their services to consumers who just think that advisers flog products. In addition, in a world of excess credit availability there's no longer the necessity to save or plan for the future. Those consumers who could make use of the pension advice allowance are also being encouraged by economic policymakers to gorge themselves on credit in order to boost our economy. There's never a rainy day to plan for in cloud-credit-land, as you can fly to somewhere sunny even if you can't afford it. So why would you want to employ the services of a financial adviser to help you plan for something you can get on credit today?
The whole advice allowance is another attempt to plug an advice gap which the FCA made worse through their implementation of the Retail Distribution Review. The Money Advice Service failed to plug the gap, as did Pension Wise. Without more joined up thinking, which includes taming the consumer credit beast, there's nothing to suggest the advice allowance will succeed but I'll be happy to be proved wrong.
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