Updated 27 May 2021
Drawdown investment pathways are off-the-peg products designed for people who want to draw their pension using the drawdown option without first obtaining regulated financial advice. Here are the pros and cons of taking this approach to your retirement income.
Investment pathways are an initiative from the Financial Conduct Authority (FCA) introduced in February 2021. They provide people aged 55 or over who have defined contribution pensions and want to access their pension pot with a range of ready-made investment options. They're applicable if you're:
Pension drawdown is an alternative to an annuity. With drawdown, you can receive a pension income while leaving your fund invested instead of using all the money to buy an annuity, which gives you a guaranteed income for life or a specified period. Drawdown is more flexible but carries a higher risk and the income from it is not guaranteed.
With drawdown, your pension fund can continue to generate growth on the money that remains in it, potentially boosting your retirement income or allowing your pot to last longer. However, if your investments do badly, your pot will shrink faster – meaning that it will run out sooner unless you lower your income from it. That's why your pension fund must be wisely invested.
Investment pathways have been created as a default option for people who have or want to choose drawdown without firstly obtaining regulated financial advice. The idea is that these ready-made, good-value investments, which broadly match a range of goals, will provide a better retirement outcome. There are no obligations to invest in pathways, and many people will prefer to choose their own investments to better meet their attitude to risk, retirement plans, and long-term goals.
Investment pathways are available to you if you:
However, this does not necessarily mean that they will be the best solution for you.
The FCA has identified four very broad investment objectives to design the investment pathway options around. Depending on which pathway you choose, pension providers can offer you an investment pathway fund with varying levels of risk. Be aware that these are designed around general retirement income objectives and are not tailored to your personal circumstances. The four pathways are set up like this:
As investment pathways are off-the-peg products, they're quick to arrange and you don't have to pay for financial advice. The FCA has introduced them because it wants more people to think about their investments when going into drawdown, so they remain appropriate to their needs. The FCA is concerned that people who hold too much of their pension in cash or cash-like investments risk missing out on valuable investment returns – and having the real value of their pension eaten away over time by inflation.
The new investment pathways offer a very limited range of options based on four basic outcomes. In addition, they're not based on your personal circumstances and don't take your other financial circumstances into account. Once in drawdown, you retain responsibility for purchasing your investments – and that includes investment pathways funds – so you'll still need to check the risk level and objective of the fund to see if it's aligned with your needs. And, as you've chosen the pathway yourself (and, by default, the fund that comes with it offered by your pension provider), rather than selecting investments based on the information given by a financial adviser (who is regulated by the FCA), there's no come-back if things don't pan out as expected.
Worryingly, although investment pathways are designed to be an easy way for people to make better pension investment choices, the information provided is still quite dense. And, with no one to fully explain what it all means, it can be a rather bewildering experience trying to understand it all if you're not a financial expert.
The key point here is that investment pathways can't be tailored to your individual needs. What's more, there's no way of knowing if a particular pathway is right for you. Pension investments are complicated and, if you make the wrong investment decision, it could seriously affect how much money you'll have throughout your retirement.
When it comes to drawdown pensions, Citizens Advice recommends: "The money in your pension fund needs to carry on growing to replace what you are taking out. So you'll need your fund to be wisely invested to make sure you don't lose out. Make sure you get independent financial advice from a professional to help you make good decisions about using your pension fund and how it's invested."
So, while the new investment pathways may suit some people, if you want more bespoke help tailored to your individual needs, circumstances, plans, and goals, the only way to access this is by seeking regulated financial advice.
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