The Pensions Investment Pathways Initiative
Updated: Jun 4
The Financial Conduct Authority (FCA) is introducing the investment pathways initiative to make sure that people have access to good value and simple investments (that widely match their retirement goals) if they have a pension drawdown account.
The reforms are made to help savers make improved decisions on how to invest their drawdown fund and ensure they do not end up holding large portions of their pension in cash over the long-term.
Historically it was mainly used by those with larger pots who opted for drawdown after taking professional financial advice, while drawdown has been available for many years. The number of people going into drawdown with smaller funds and without the benefit of advice has rocketed since the pension freedoms were introduced.
As a result, the FCA is anxious that people who have too much cash sitting in their pension are risking missing out on valuable investment returns and having the actual value of their pension being eaten away over time by inflation.
There will be no obligation on people to invest in pathways, although, many individuals will prefer to choose their investments themselves to better meet their attitude to risk, plans for retirement, and long-term goals.
What is an investment pathway?
People who don’t take financial advice and choose to keep their money invested while taking an income in retirement (i.e. ‘drawdown’), will be impacted by the new rules.
Customers who transfer to a drawdown account or who enter drawdown will be given these three options below:
choosing investment pathways
sticking with the investments they already have
choosing their investments
If they were to choose the investment pathway route, pension companies are required to offer customers four investment pathway options. These won't be tailored based on their circumstances but rather designed around four very broad retirement income objectives.
These four objectives are:
I have no plans to touch my money in the next five years
I plan to take out all my money within the next five years
I plan to use my money to set up a guaranteed income (annuity) within the next five years
I plan to start taking my money as a long-term income within the next five years
Pension companies then will offer investors an investment pathway fund depending on which of the four options that they have chosen.
What do the experts say?
The senior analyst at AJ Bell (Tom Selby), said this: “One of the central aims of pathways is to reduce the number of customers holding cash or cash-like investments for the long term and seeing the value of their money whittled away by inflation. They also aim to ensure people engage with their investments when going into drawdown, so they remain appropriate to their needs.”
“While these are laudable goals, those who are nudged towards the regulator’s pathways need to appreciate that this isn’t advice based on their circumstances and that the responsibility for their investment decisions still rests with the individual.”
“Pathways merely offer very wide investment options based on the four basic outcomes. As such, they do not consider someone’s appetite for risk or withdrawal strategy in any detail and must not be seen as a replacement for engagement or seeking regulated financial advice.
Pensions director at Aegon (Steven Cameron), said: “For some people, their plans may be clear, and they may be able to identify a retirement scenario. For others, including individuals over 55 who may have lost their job as a result of the pandemic, it may be difficult to think as far ahead as five years.”
“Investment pathways won’t support any help in deciding how much income to take. From an investment perspective, they will also not look at an individual’s full personal circumstances and attitude to investment risk, and similar with advice, there is not a ‘personal recommendation’ of which pathway to choose.”
“While investment pathways will offer some help to those who choose to go it by themselves, it’s very important to be able to understand that they will not replace the benefits of taking financial advice from a professional.”