Investment pathways in the UK

The FCA (Financial Conduct Authority) introduced “Investment Pathways” in February 2021 for non-advised drawdown consumers and financial advisory firms. The idea behind this new investment pathways initiative was to offer people aged 55 or more who held defined contribution pension schemes a choice of readymade investment opportunities for:

• Transferring some or all their pension pots into a drawdown account
• Moving money that was already in a drawdown account into a different drawdown facility

If you are interested in finding out how these new FCA investment pathways work and whether they could be suitable for you, please read on.

Pension drawdown and how it works

The investment pathways the FCA created are all about providing you with pension drawdown options to provide long-term income in your retirement.

As you are probably already aware, you can access your private pension savings once you reach the age of 55 or over. If you want to, you can use your funds to purchase a guaranteed income annuity plan.

An annuity will give you a guaranteed income for the rest of your life. But if you convert all of your pension pot money to set up an annuity while guaranteeing an income for your retirement years, it takes away any financial flexibility. On the other hand, if you use the new investment pathways options, you retain full flexibility.

The flexibility of the various pension drawdown products

Drawdown is one of the most popular choices for accessing a defined contributions pension plan pot. But there are many products from which to choose, dependent on your future plans. Some of the products available include:

• Aegon investment pathways
• Aviva investment pathways
• Fidelity investment pathways
• Reassure investment pathways
• Royal London investment pathways
• Standard life investment pathways

You can click on any of the above product providers for more information.

There are four FCA drawdown scenarios from which to choose, depending on your retirement plans.

• I do not intend to touch my money for the next five years
• I plan to use my money to set up an annuity sometime in the next five years
• I plan to start withdrawing money as a long-term income sometime in the next five years
• I plan to withdraw my entire pension pot within the next five years

The primary idea behind investment pathways is that they allow you to keep your money invested while giving you the option of also taking lump sums or a regular income. But whereas a steady income is guaranteed when you buy an annuity, the income you can earn from the remaining money depends on how your investment pathway funds perform.

The pros and cons of FCA pathway investments

Like many things in life, investment pathways have their advantages and disadvantages, some of which are as follows:

The pros

• Flexibility – pick and mix from any of the options
• Take as much money as you require as and when the need arises
• Plan your annual withdrawals to minimise income tax liability
• Returns on the money left in your investment funds have the opportunity to grow
• Once you begin making withdrawals, you can still make new investments to the tune of £4,000 per annum and claim tax relief.

The cons

• Money left in your investment option funds can decrease if funds underperform
• If you do not take out an annuity, your future income cannot be guaranteed
• Analysing the options from different pathway investment providers is difficult
• Providers charge fees each time you make a withdrawal or drawdown
• Beneficiaries may have to pay inheritance tax when you die

Difference between investment pathways and seeking financial advice

The difference between the four investment pathway options and the various products from different providers can be pretty confusing. You cannot tailor the pathways to your specific, individual requirements as your plans to touch your money may not accord with any of the four options.

Pension schemes can be quite complicated. If you are not an expert (and most of us are not), you should seek expert professional advice from an independent financial adviser. A suitable personal recommendation can go a long way to ensuring you adopt the best investment strategy to meet your retirement goals.

Exploring your options

Having now had the investment pathways explained, it might well be the case that you want to consider a different investment option. For example, you could decide to invest in a stocks and shares ISA or open a general investment account rather than take one of the pension investment pathways.

Pensions, including SIPPs and Workplace pensions, are great, especially if you have the notion of ‘I will not touch my money until I retire’. But what if you desperately need short-term funds? You will be hamstrung.

Another consideration is what if you are self-employed and don’t have a steady income on a regular basis? What’s the best self-employed pension option?

There is also one other significant thing to think about – income tax. If you’re considering 50s retirement savings, once you’ve taken 25% of your pension pot tax-free, the balance, when taken as income, will be taxed in accordance with your annual personal tax allowance. But not if that income comes from a stocks and shares ISA. In that case – it’s tax-free.

It doesn’t matter what your retirement age will be – all ISA withdrawals from investment ISAs are tax-free. All

Weighing the risks

There is no suggestion that you should invest in a stocks and shares ISA rather than a pension. Pensions are key to your financial well-being in retirement. However, it would be best if you never forgot that investments could appreciate and depreciate.

But when considering investment pathways, funds left in them are subject to the same risk. So check out your investor profile options to access your investor’s preferences. It could well be that it would be more beneficial from an income tax viewpoint to invest some of those funds in a stocks and shares ISA.

Getting the best advice

The retirement savings landscape is a challenging terrain to negotiate. Getting the right professional financial advice is essential as advisers must consider pathway investments in their personal recommendations (COBS 9.3.3A). Regardless of the financial institution you contact, please ensure they are authorised and regulated by the Financial Conduct Authority. You have to be extra careful.

Just because the company’s website says they are FCA approved and regulated doesn’t mean they are. So go one step further and check their company number against the FCA listing. Remember, these are your retirement funds we’re talking about. You cannot afford to leave anything to chance.

FAQ

What is an investment pathway?

An investment pathway is an investment solution created by FCA. Investment pathways are a range of ready-made investment solutions offered by financial firms to non-advised pension drawdown customers to help maximise their retirement income and meet retirement objectives. For their retirement plan, customers select an objective from a range of drawdown options and receive an appropriate solution based on their choice.

Why investment pathways were created?

Investment pathways were created to ensure that the taxable drawdowns of people were invested, and their retirement needs were met as they were too focused on their tax-free cash drawdown. It also prevents people from keeping cash investments or drawdowns.

How many investment pathway objectives are there?

There are four investment pathway objectives. Investment 1 – I have no plan to touch my money in the next five years, Investment 2 – I plan to use my money to set up a guaranteed income (annuity) within the next five years, Investment 3 – I plan to start taking my money as a long-term income within the next 5 years, and Investment 4 – I plan to take out all my money within the next 5 years.