Investment Pathways are coming: Here’s everything savers need to know

From 1 February 2021 those who do not take financial advice when you place all or part of your pension into drawdown or transfer to a new drawdown plan – meaning you keep your money invested while taking a retirement income – will be offered ‘Investment Pathways’.

This change, instigated by the FCA, is significant and it is important to understand the new options available.

One of the central aims of pathways is to reduce the number of people holding cash or cash-like investments for the long term and seeing the value of their money whittled away by inflation. Investment pathways also aim to ensure you engage with your investments when going into drawdown so they remain appropriate to your needs.

While these are laudable goals, if you are nudged towards the regulator’s pathways you should appreciate that this isn’t advice based on your personal circumstances and that the responsibility for your investment decisions still rests with you.

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 you 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 your needs and that you are comfortable with the charges you are paying in return for the service being offered. All investors – whether you are invested in pathways or have chosen your own investments - need to regularly review your investments to ensure you are delivering against your objectives and remain appropriate for your evolving personal circumstances.

Investment Pathways: Questions answered

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 you do not end up holding large portions of your 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?

When you enter drawdown or transfer to a drawdown account you will initially be given the option of:

1. choosing Investment Pathways;
2. choosing your own investments; or
3. sticking with the investments you already have

If you choose your own investments or stick with the investments you already have, your ‘pathway’ journey will come to an end.

If you choose the Investment Pathway route, pension companies will be required to offer you four Investment Pathway options. These will not be tailored based on your 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 you an Investment Pathway fund depending on which option you have chosen.

What happens if you want to buy an Investment Pathway fund?

This will depend on the approach taken by the provider. If you indicate you want to buy an Investment Pathway fund, you will then go through the normal process of being placed into drawdown. Once in drawdown, you will retain responsibility for purchasing your investments – including Investment Pathways funds.

Where you said you wanted to buy an Investment Pathway investment then don’t do it – either by keeping your money in cash or choosing different investments – we will remind you of your 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 you pay?

Again, this will vary from provider-to-provider, AJ Bell will be offering the following pathway 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 you choose to invest in cash or cash-like investments?

If you choose to invest 50% or more of your new drawdown fund in cash or cash-like investments then your provider will make sure you have made an active decision to do that. The provider will also issue a warning to you outlining that the pension pot 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.

Important information: These articles are for information purposes only and are not a personal recommendation or 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. The value could go down as well as up. Make sure you read the factsheet, KIID and prospectus before investing to understand the full picture.