I’m planning to enter drawdown in the next six months and have read I’ll be offered an ‘Investment Pathway’? Can you explain exactly what this is?

Daniel 

Tom Selby, AJ Bell Head of Retirement Policy, says:

Since 2021, hundreds of thousands of people who choose to keep their retirement pot invested while taking an income through drawdown each year have been required to be offered ‘Investment Pathways’ by their pension provider. The same is true of those who transfer a drawdown plan to a new drawdown provider.

One of the central aims of this initiative, instigated by the FCA (Financial Conduct Authority), 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.

The FCA also wants more people to think about their investments when going into drawdown, so they remain appropriate to their needs.

There are a few fundamental things you need to know about these Pathway options. First, they aren’t being presented to you based on your personal circumstances but rather offer very broad investment options based on four basic outcomes.

Second, they do not take into account your appetite for risk or withdrawal strategy in any detail and must therefore not be seen as
a replacement for engagement or seeking regulated financial advice.

Third, responsibility for investment decisions continues to rest with you.

If you choose a Pathway fund, you still need to check that the risk level and objective of the fund is aligned with your needs and you are comfortable with the charges you are paying.

If you enter drawdown – whether invested in a Pathway fund or having chosen your own investments – you need to regularly review your investments to ensure they are delivering against your objectives and remain appropriate for your evolving personal circumstances.

What is the point of Pathways?

Pathways aim to help you make better decisions on how to invest your drawdown fund and ensure you do not end up holding large parts 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 is no obligation on you to invest in a Pathway fund, however, and many investors prefer to choose their own investments to better meet their attitude to risk, retirement plans and long-term goals.

Who is offered Pathways and how does the process work?

The rules 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.

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

● Choosing an Investment Pathway;

● Choosing your own investments; or

● 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 there and then.

If you choose the Investment Pathway route, you will be presented with four Investment Pathway options. These will not be tailored based on your personal circumstances, but rather designed around four very broad retirement income objectives.

You will then be offered an Investment Pathway fund based on the option you have chosen.

What happens if you decide you want to buy a Pathway fund?

This will depend on the approach taken by your 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, you retain responsibility for purchasing your investments – including Investment Pathway funds.

Where an AJ Bell customer has said they want to buy an Investment Pathway fund then doesn’t – either keeping their money in cash or choosing different investments – they will be sent a reminder of their original choices.

However, as is always the case with do-it-yourself investments, it will be up to the individual investor to complete any transaction.

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Tom Selby) and the editor of the article (Ian Conway) own shares in AJ Bell. 

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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