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So, what are Investment Pathways?

The pension freedoms rules introduced in 2015 have allowed pension savers greater flexibility in how they can access their savings.

As a result, however, the industry regulator, The Financial Conduct Authority (FCA), has identified that many consumers have been missing out on the full benefits of this new flexi-access drawdown approach, which basically just means giving you more flexibility on how you withdraw an income from your pension savings.

The FCA believes that something had to change to ensure customers are not left to make these life changing decisions alone with little knowledge or guidance available. 

A Zurich/YouGov study found that tens of thousands of pension savers have taken the maximum 25% tax-free cash from their pension pots only to leave the remaining amount untouched.1

The concern of the FCA is that these savers are missing out on hard earned retirement income. Furthermore, the FCA itself found that 33% of non-advised pension customers, so those that have not sought advice but have simply gone it alone to plan their retirement income, have their pension pots sat in cash and are missing out on the benefits of longer-term investing, well into their retirement.

Introducing the Investment Pathways

In a bid to help alleviate the missed opportunities of pension customers, the regulator has introduced the Investment Pathways initiative which they believe is a necessary ‘significant market intervention’. 

They hope the initiative will offer consumers with a pension drawdown account, so an account that allows you to draw an income from your pension savings, access to simple investments that are suitable to their needs, for reasonable costs. 

The idea is that all consumers who enter the drawdown phase or move to a pension account that offers drawdown, will be given three options to choose from:

  1. Investment Pathways.
  2. Select your own investments.
  3. Retain existing investments. 

What are the four key goals the Investment Pathways offer?

The Investment Pathways aim to mirror the four key goals that someone may have for the money in their pension drawdown account, to ensure they have access to simple options to meet their goals. The FCA has broadly deemed these options to be as follows:

  1. I have no plans to touch my money in the next five years.
  2. I plan to use my money to set up a guaranteed income (annuity) within the next five years.
  3. I plan to start taking my money as a long-term income within the next five years.
  4. I plan to take out all my money within the next five years.

Under these key options, pension providers will offer a single solution to meet each of the four objectives, hoping that simplicity will lead to greater uptake of the Investment Pathways. 

What are the fees for the Investment Pathways?

There have been calls to cap the price of these options and the FCA has listened by introducing a soft price cap of 0.75%. 

This will inevitably impact the types of investment options that can be offered and it is suggested we are likely to see mostly lower-cost multi-asset index funds – so funds that track particular indexes such as the FTSE, rather than funds that are run by fund managers.

It is important to highlight that the Investment Pathways route is a simple, generalised option to fit the vast majority of people and will not offer individuals tailored financial advice. Speaking to a financial adviser will not only open the door to more sophisticated investment options but will also ensure that your investments are aligned to your risk profile and objective timeframes.

There is also a lot of value that can be added by an adviser in terms of creating a tax efficient retirement plan, tailored specifically to your own personal circumstances, something which can be difficult and time consuming to do alone.

The opportunities that are opened up to individuals by speaking to an independent adviser can be substantial, compared to those that go it alone.  The Investment Pathways would come under the realm of ‘guidance’ so it’s important that you understanding the difference. Take a look at a previous TPO article, Advice vs Guidance, which clearly outlines the differences and pros and cons for both options.

If you’d like to speak to one of our expert financial advisers about your own personal retirement needs, why not get in touch and arrange a free consultation. We’re offering all those with £100,000 or more in pensions, savings or investments a free review worth £500.

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Please note: This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.  

References 

  1. FT - What advisers should know about the FCA's investment pathway rules