The Financial Conduct Authority (FCA) is introducing the investment pathways initiative to ensure that anyone with a pension drawdown account has access to simple, good-value investments that broadly match their retirement income goals. The reforms are designed to help savers make better decisions on how to invest their drawdown fund and ensure they don’t end up holding large portions of their pension in cash over the long-term. While drawdown has been available for many years, historically it was mainly used by those with larger pots who opted for drawdown after taking professional financial advice. But since the pension freedoms were introduced, the number of individuals going into drawdown with smaller funds and without the benefit of advice has rocketed. As a result 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. The new rules will impact people who don’t take financial advice and choose to keep their money invested while taking an income in retirement (i.e. ‘drawdown’). Customers who enter drawdown or transfer to a drawdown account will initially be given the three options:

1. choosing investment pathways
2. choosing their own investments
3. sticking with the investments they already have

If they choose the investment pathway route, pension companies will be required to offer customers four investment pathway options. These will not be tailored based on their personal circumstances, but rather designed around four very broad retirement income objectives. One of the central aims of pathways is to reduce the number of customers holding cash or cash-like investments for the long term and seeing the value of their money whittled away by inflation. They also aim to ensure people engage with their investments when going into drawdown so they remain appropriate to their needs.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of January 2021 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.