Written by Nathan Munt – Independent Financial Planner
Following its delayed launch in August 2020, the Financial Conduct Authority’s (FCA) ‘investment pathways’ initiative begun on 1 February 2021. This resulted in a fundamental change in how people access pension drawdown in retirement, but what is the reason behind this?
As a result of their ‘Retirement Outcomes Review’, the FCA published its second policy statement at the end of July 2019 detailing its remedies to address issues identified within the UK retirement market.
Pension freedoms, which were launched in April 2015, have given people more choice over how and when they take withdrawals from their pensions. Rather than having to buy an annuity at retirement, many more people are opting to go into drawdown.
Drawdown is considered to be a riskier retirement option than buying an annuity and the FCA have highlighted concerns that many people could be losing out due to poor decisions. Examples of poor decisions include having a pension inappropriately invested in cash or choosing income withdrawals without assessing the long-term implications. Specifically, their concerns are aimed at those who are making these decisions without receiving any financial advice.
There are, of course, plenty of instances where it may be appropriate not to seek advice before entering a drawdown arrangement. For example, it may be a small pension fund that you aren’t going to rely on for a regular income, you may already have an extensive understanding of pension freedoms, or you may require access to your funds urgently and do not have the time to wait to receive professional advice.
Following the introduction of Investment Pathways, should you decide to move funds into drawdown, pension providers will be required to offer you the choice of remaining invested in your current investments (where applicable), choosing your own investment strategy, or selecting one of four investment pathways. As previously mentioned, this only applies where someone has not received advice.
These pathways are ready-made investment options designed to meet one of four broad retirement objectives:
- For those who have no plans to touch their money in the next five years.
- For those who plan to use their money to set up a guaranteed income (annuity) within the next five years.
- For those who plan to start withdrawing their money as a long-term income within the next five years.
- For those who plan to take out all their money within the next five years.
These broad categories were created to help meet the needs of the many people who are not engaged with their pensions. However, even with the potential benefits that investment pathways may bring, recent events have highlighted how important it is to give serious thought to your retirement plans.
What else do you need to think about?
Choosing the right investments for drawdown is only one piece of the puzzle, but these four options will help to simplify your choices if you do not wish to receive financial advice. Still, you should note that these options will not necessarily be suitable for everyone and you should always consider your own personal circumstances, objectives and attitude to risk.
Assuming you get the investment approach right, you should also consider income withdrawal risks. Many people underestimate just how long they are likely to live, and if your withdrawals are too high, you can find yourself running out of money too soon. On the contrary, it’s important to enjoy retirement and live your life to the full. Unfortunately, some people find themselves so worried about running out of money that they draw too little from their pensions.
Therefore, drawdown is about balancing the risks. Anyone who is considering this option for their retirement but is struggling to make investment decisions, understand the risks associated with their withdrawals, and/or do not know how to minimise their tax bill, should still consider speaking with an independent financial planner first.
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This is solely for informational purposes and nothing in it is intended to constitute advice or a recommendation. You should not make any investment decisions based on this content. The value of investments can fall as well as rise and you may not get back the amount you originally invested. Pension eligibility depends on individual circumstances.
While considerable care has been taken to ensure this information is accurate and up-to-date, no warranty is given as to its accuracy.