Hundreds of thousands of savers face a retirement income lottery as providers are poised to put their pension pots into a hotchpotch of ‘one-size-fits-all’ investment funds. From now, over-55s who dip into their pension for the first time without getting financial advice – and who have not indicated a wish to manage their pension fund themselves – could have the remainder of their pot funnelled into one of four funds offered by their provider. The move is part of a new ‘investment pathways’ experiment launched by the financial regulator. It is designed to make it easier for savers who do not take financial advice to do the right thing with pensions. But some experts warn the new system could lead to poorer retirements for some and cause financial harm. They say people should pay for financial advice instead. Others warn that savers could be ripped off by pension providers who put their pots into expensive funds to boost their profits. Yet, the pathways will at least mean that investors get some form of guidance in putting their money to work in a fund. When over-55s raid their pension pots for the first time without financial advice, they will be questioned about what they plan to do with their money. They will be asked which of these four categories they fit into:

1. I have no plans to touch my money in the next five years;
2. I plan to use my money to set up a guaranteed income annuity within the next five years;
3. I plan to start taking my money as income within the next five years;
4. I plan to take out all my money within the next five years.

Depending on their answer, savers will have their pension funds funnelled into one of four default funds – labelled pathways 1, 2, 3 and 4. The regulator has tasked every pension firm to come up with four funds that fit the bill. Most experts agree there is no substitute for good financial advice in the approach to retirement – and, once retired, as savers manage their pensions and ISAs. However, many savers either do not want advice or feel they can’t afford it. Thus investment pathways are seen as an imperfect, poorer alternative, but one that will help avoid the worst pitfalls.

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 February 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.