The financial press has been awash with information about the introduction of Investment Pathways, but what are they and how do they affect you, your business, and, most importantly, your clients.
In the summary of its retirement outcomes review policy statement (PS19/21) the FCA states: “the Government’s 2015 pension freedoms gave consumers more flexibility in how and when they can access their pension savings. In June 2016, we launched the Retirement Outcomes Review to investigate how consumers and providers were responding to the pension freedoms.”
The FCA published the Retirement Outcomes Review Final Report in June 2018. This set out its findings and proposed a package of remedies. PS19/21 sets out final rules on:
- introducing ‘investment pathways’ for consumers entering drawdown without taking advice;
- ensuring that consumers entering drawdown invest predominantly in cash only if they take an active decision to do so; and
- giving consumers in decumulation annual information on all the costs and charges they have paid.
Those individuals who choose to take their pension income via drawdown will be given three initial options:
- choose investment pathways
- choose their own investments
- retain the investments they already have.
Studies have shown that over 40% of people who went into drawdown took the tax-free cash and left the remaining pension untouched and 33% of non-advised customers remain invested in cash and lose out on the growth associated with asset backed investments.
That does not mean that advisory firms need not take into account investment pathway solutions.
The FCA has decided on (in their words) significant market intervention to ensure that anyone with a pension in drawdown pot has access to simple investments that broadly match their needs. These investments will have a price cap of 75bps.
Investment Pathways were introduced on 1st February 2021 and are specifically aimed at clients who are not taking advice in relation to drawing from their pension either because they are using a non-advised self-select platform or are accessing their pension directly from a product provider. That does not mean that advisory firms need not take into account investment pathway solutions.
The new rules also expect you to point your clients towards the drawdown investment pathways tool on the Money Advice Service website:
https://www.moneyadviceservice.org.uk/en/tools/drawdown-investment-pathways which is designed to help individuals shop around for drawdown products that offer ready-made investment pathway options, compare costs and charges and compare how providers will invest the money.
The tool also directs consumers that investment pathway options may be suitable for a consumer if they:
- are 55 or older or under age 55 and looking to access your pension due to ill health or a protected retirement age;
- have a defined contribution pension;
- have decided what to do with your pension and researched how much income you could get when you stop working;
- have decided to take or have previously taken all your tax-free lump sum, leaving the rest of your pension invested (pension drawdown);
- want simple ready-made investment options managed by your provider;
- are not considering taking financial advice.
The investment pathway solutions will bracket clients into 4 very broad categories in a ‘one size fits all of these’ portfolio and will not be personally tailored to the individual. They ask consumers to consider four options:
- I have no plans to touch my money in the next 5 years;
- I plan to use my money to set up a guaranteed income (annuity) within the next 5 years
- I plan to start taking my money as a long-term income within the next 5 years
- I plan to take out all my money within the next 5 years
Information given to consumers using investment pathways
The FCA proposes that consumers using investment pathways receive an annual statement that includes the following:
- A statement reminding them of the current size of their drawdown pot and their investment pathway choice, or the split between different pathways if that is what the consumer selected.
- Information on the other investment pathways available. If the consumer has not split their pot, a reminder of their ability to split their drawdown pot across these (where this option is available).
- A statement reminding the consumer that they can switch their investments at any time (for example, by selecting another investment pathway) or move into another product at any time and that they should shop around before doing so.
If the consumer has not made any changes to their investment pathway within 5 years of entering the pathway, or further multiples of 5 years thereafter, their provider should consider including in the next annual statement:
- a reminder to the consumer that 5 (or 10, as relevant) years has elapsed since they selected the investment pathway; and
- a prompt to the consumer to review their investment decision.
Consumers will be given warnings regarding leaving their pension pot in cash to ensure that this is an active decision, along with the potential risks of leaving long-term investments in cash or cash-like assets.
Implications for advisers
A lot to think about for providers of non-advised and self-select platforms, but advisers are not immune from the impact of investment pathways.
Product providers must offer investment pathway options to both non-advised and advised customers which means that clients of advisory firms will become aware of the options, and the potential cap on fees. This may put more pressure on you to demonstrate the added value of your advisory service. The rules also say that if you have not given the client a personal recommendation in respect of drawdown in the last twelve months, you must take your client through the investment pathway process.
The four options above will lead clients down four very broad paths and will not offer individually tailored solutions that will consider your client’s attitude to risk, investment preferences and capacity for loss.
One of the reasons for entering into drawdown is the ability for individuals to adjust the income they withdraw from their pension pot year by year in accordance with their circumstances. A consideration is whether to take tax-free cash, taxable income or a combination of the two. This is important if your client still receives earned income. As their adviser, you are best positioned to work with your client to understand the profile and pattern of their withdrawals. This income planning, maybe supported by cash-flow modelling, will enable you to demonstrate the sustainability of your client’s withdrawal plans, discuss the differences between essential and discretionary spending and help you to tailor the portfolio accordingly.
A great deal to think about. With the introduction of pension freedoms and the advent of self-select and non-advised platforms, investment pathways will be a feature of the pensions landscape for a long time. The question is how the FCA sees the 75bps price cap and whether it tries to impose this in the same way that its predecessor tried with the introduction of the low-cost stakeholder products all those years ago.
The advisory community can view this as another opportunity to cement relationships with clients and demonstrate the advantages of their service.
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