How to spend just £750 to get £1,500 of financial guidance

Becky O’Connor, director of public affairs at PensionBee, said: “Getting financial advice can be worthwhile as you approach the age when you can access your pension – or as you near retirement. This is particularly true if your pension circumstances are a little complicated.”

To make use of the allowance, you apply to your pension scheme administrator. 

Ms O’Connor added: “Not all schemes offer it, but if yours does, anyone with a pension can use it. This is true even of those younger than 55. If you want financial advice, it’s worth checking if your scheme offers this allowance.”

Payments are usually made directly to your chosen financial adviser. The adviser must be authorised and regulated by the Financial Conduct Authority (FCA).

Note that the allowance is not available via defined benefit schemes, such as final salary pensions.

How does the allowance work in practice?

When you claim the advice allowance, the money is taken out of your pension, meaning you pay for it in a kind of “roundabout” way.

That said, thanks to employer contributions and tax relief, the £1,500 you spend on three advice sessions may actually cost you far less than you realise. Indeed, it could turn out to be a very affordable way to access this kind of advice.

We asked Ms O’Connor to explain how it might work in practice. 

She said: “For example, for a basic-rate taxpayer, an 8pc workplace pension contribution that is equal to £1,500 would have cost that individual £750, with a further £562.50 (3pc) coming from their employer, and £187.50 coming from basic-rate tax relief. So that £1,500 of financial advice would have effectively cost just £750.”

For a higher-rate taxpayer, the deal is even better.

Ms O’Connor added: “The £1,500 would personally cost them £562.50, with £375 from tax relief, and £562.50 from their employer.”

How taking money early affects your pension 

While this may sound appealing, you need to bear in mind that opting not to use this allowance means you have more money left in your pension to grow.

Ms O’Connor said: “If Mr Black, who has paid in £2,000 a year and receives 2.5pc growth annually takes out £1,500 for advice over three years – from age 55 to 57 – he would have £141,327 at age 68. If, on the other hand, Mr White didn’t take out the advice allowance maximum, he’d have £143,215 at age 68.”

Overall, Mr Black would end up with £1,888 less than Mr White, with £388 less growth. 

The key here is to weigh up what benefit you might get from that financial advice, to see if this is a price worth paying. It’s a tricky thing to do, since studies have shown that sound financial advice can substantially increase your pension pot.

Why might you want to take advice on your pension?

Pensions are complicated, and hugely important for funding your retirement – and there may be numerous reasons why you may be seeking guidance. 

For one thing, you might want some help in assessing your pension investments and whether they’re suited to your preferences, and stage in life. 

Jason Witcombe, chartered financial planner at Empower Partners, said: “You might wish to appraise the performance of the funds you are invested in, and make sure the level of risk and reward you are targeting is aligned with your emotional and financial ability to take risk.”

You might also want to look into consolidating multiple pension funds in a bid to simplify your finances and, possibly, to benefit from a better charging structure.