• From 1 February 2021 people who do not take financial advice when they place all or part of their pension into drawdown or transfer to a new drawdown plan – meaning they keep their money invested while taking a retirement income – will be offered ‘Investment Pathways’
• Pathways have been created by the FCA to help people choose investments based on their broad retirement plans and reduce the number of people holding cash over the long-term
• Around 200,000 people entered drawdown in 2019/20 without fully withdrawing their fund, while a further 375,000 plans were fully withdrawn*
• Engagement remains critical for those who choose to stay invested while taking an income in retirement
Tom Selby, senior analyst at AJ Bell, comments:
“Hundreds of thousands of people entering pension drawdown will from 1 February be offered Investment Pathways. The same is true of those who transfer a drawdown plan to a new drawdown provider.
“This change, instigated by the FCA, is significant and it is vital savers understand the new options available to them.
“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 personal circumstances and that the responsibility for their investment decisions still rests with the individual.
“Pathways merely offer very broad investment options based on four basic outcomes. As such, they do not take into account someone’s appetite for risk or withdrawal strategy in any detail and must not be seen by as a replacement for engagement or seeking regulated financial advice.
“Investors still need to check that the risk level and objective of the fund is aligned with their needs and that they are comfortable with the charges they are paying in return for the service being offered. All investors – whether they are invested in pathways or have chosen their own investments - need to regularly review their investments to ensure they are delivering against their objectives and remain appropriate for their evolving personal circumstances.”
* https://www.fca.org.uk/data/retirement-income-market-data (note that not all ‘fully withdrawn’ plans entered drawdown, so not all would be offered investment pathways under the new rules)
Investment Pathways Q&A
Why are Investment Pathways being introduced?
The reforms are designed to help savers make better decisions on how to invest their drawdown fund and ensure they do not end up holding large portions of their pension in cash or cash-like investments over the long-term. This is because the FCA is worried people who hold too much cash in their pension risk missing out on valuable investment returns and having the real value of their pension eaten away over time by inflation.
There will be no obligation on people to invest in pathways, however, and many will prefer to choose their own investments to better meet their attitude to risk, retirement plans and long-term goals.
Who will be affected?
The new rules will impact people who do not take financial advice and choose to keep their money invested while taking an income in retirement (‘drawdown’).
This includes people who move all or part of their pension savings into drawdown, or people who transfer funds already in drawdown to a new provider.
What will people entering drawdown or transferring to drawdown experience?
Customers who enter drawdown or transfer to a drawdown account will initially be given the option of:
1. choosing Investment Pathways;
2. choosing their own investments; or
3. sticking with the investments they already have
If they choose their own investments or stick with the investments they already have, the customer’s ‘pathway’ journey will come to an end.
If they choose the Investment Pathway route, pension companies will be required to offer customers four Investment Pathway options. These will not be tailored based on their personal circumstances, but rather designed around four very broad retirement income objectives.
These objectives, set out by the FCA, are:
Option 1: I have no plans to touch my money in the next 5 years
Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years
Option 3: I plan to start taking my money as a long-term income within the next 5 years
Option 4: I plan to take out all my money within the next 5 years
Pension companies will then offer them an Investment Pathway fund depending on which option they have chosen.
What happens if customers want to buy an Investment Pathway fund?
This will depend on the approach taken by the provider. If an AJ Bell customer indicates they want to buy an Investment Pathway fund, they will then go through the normal process of being placed into drawdown. Once in drawdown, the customer retains responsibility for purchasing their investments – including
Investment Pathways funds.
Where an AJ Bell customer said they wanted to buy an Investment Pathway investment then doesn’t do it – either by keeping their money in cash or choosing different investments – we will remind them of their original choices. However, as is always the case with DIY investments, it will be up to the individual to complete any transaction.
How much will pathways customers pay?
Again, this will vary from provider-to-provider. AJ Bell Youinvest customers will be offered the following pathways funds:
Option 1: I have no plans to touch my money in the next 5 years
• Fund: VT AJ Bell Balanced fund
• Objective: To achieve long-term capital growth with a balanced approach between defensive assets such as cash, fixed interest securities, money-market funds and collective investment schemes following alternative strategies such as property and commodities, and higher risk assets such as equities.
• Fund OCF: 0.34% + platform charge of a maximum 0.25% (see below for details)
Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years
• Fund: VT AJ Bell Cautious fund
• Objective: To achieve long-term capital growth with a high level of exposure (often indirect) to defensive assets such as cash, fixed interest securities, money market funds and collective investment schemes following alternative strategies such as property and commodities and a low level of exposure to higher risk assets such as equities.
• OCF: 0.35% + platform charge of a maximum 0.25%
Option 3: I plan to start taking my money as a long-term income within the next 5 years
• Fund: VT AJ Bell Income fund
• Objective: To generate an income, whilst maintaining capital value over a typical investment cycle. It has a target average yield of 3-5% per annum (over a trailing three year period), which is not guaranteed. This is consistent with a goal of capital preservation and drawdown of an income.
• OCF: 0.74% + platform charge of a maximum 0.25%
Option 4: I plan to take out all my money within the next 5 years
• Fund: VT AJ Bell Cautious fund
• Objective: To achieve long-term capital growth with a high level of exposure (often indirect) to defensive assets such as cash, fixed interest securities, money market funds and collective investment schemes following alternative strategies such as property and commodities and a low level of exposure to higher risk assets such as equities.
• OCF: 0.35% + platform charge of a maximum 0.25%
AJ Bell Youinvest’s annual platform custody charge for funds is:
• 0.25% on the first £250,000 funds invested
• 0.10% on the fund value between £250,000 and £1m
• 0.05% on the fund value between £1m and £2m
• No charge on the fund value over £2m
What happens if a customer chooses to invest in cash or cash-like investments?
If a customer chooses to invest 50% or more of their new drawdown fund in cash or cash-like investments then their provider will make sure the customer has made an active decision to do that. The provider will also issue a warning to the customer outlining that the fund is in danger of being eroded by inflation.
Where can people go to for further information?
Pension Wise offers free and impartial Government guidance to people over 50 who have a personal or workplace pension and will cover Investment Pathways. The Money and Pensions Service will also be offering an Investment Pathways comparison tool. Anyone wanting more bespoke help tailored to their individual needs should seek regulated financial advice.
AJ Bell does not provide advice. Before you invest you need to make sure that you understand all the risks and are comfortable that the investment is right for you. Make sure you read the factsheet, KIID and prospectus before investing to understand the full picture. The value could go down as well as up.
