What is it?
The FCA’s Investment pathways came into force this month, meaning that pension providers are now required to offer ‘investment pathways’ to non-advised customers entering drawdown. This applies to customers moving all or just part of their funds into drawdown. An investment pathway does not need to be offered where an annuity or fixed-term product (with no capital at risk) is being used.
There is a clearly highlighted issue of clients going into drawdown on their own and, in most scenarios, staying in cash regardless of what their ‘pathway’ is. The provision of pathways for clients who cannot or would rather not access advice is a useful option for this unserved segment.
For customers with pensions held with applicable providers, they will be prompted to select one of the following options when using Drawdown:
- 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.
These options will all be linked to a provider’s default investment option as a way of ensuring the client is investing, on their own accord of course, in a way that is at least broadly in line with their aims and timeframe.
The provider must also offer them the option to remain invested in their current investments if this is available, alongside the option to choose their own investments.
A comparison tool is being released by the FCA which will allow clients who choose to enter drawdown without advice to compare products and investment pathways.
What does this mean for advisers?
Before an adviser recommends a product and investment strategy, they will need to give extra consideration where the following apply:
- The current provider offers drawdown
- The current provider has created and maintains a set of investment pathways
Here, advisers should at least be outlining to a client that a non-advised route is possible by using the existing provider and one of the investment pathways made available.
What could this look like?
While there is more to it, you could broadly link one of the investment pathways to a client’s needs and consider this pathway as an option. You would then highlight the cost of this pathway and how this compares to your recommendation (not too dissimilar to how, in accumulation, you would compare the option of a stakeholder).
For those who are willing and/or able to take advice, there are likely to be a range of factors that discount the use of pathway approach.
This might be lack of flexibility (if the provider offers a limited drawdown option or restrictions on frequency/type of withdrawals).
There may also be limitations in using the pathway if circumstances will change in the coming years. This can be the case where a phased retirement path is desired but dependent on the ability to continue work.
The ability to use ‘bucketing’ may also be impractical using the pathway and if this is part of your retirement proposition, this could make the use of the default provider option unsuitable.
As this is aimed at non-advised clients, this is an opportunity to detail to your clients the value of receiving advice.
What are our thoughts?
Ultimately risk is a subjective interpretation, those non-advised clients that enter a risk profile from the provider are investing in the provider’s interpretation of risk, and therefore could be taking more/less risk than they are comfortable with.
Providers are also unable to interpret risk in line with the client’s capacity for loss and knowledge and experience, and therefore the client could potentially be taking an appropriate level of risk, but not one that they can afford should the markets drop.
What should you do?
Where applicable, the advice and suitability report should:
- Outline the Investment Pathway option
- Outline the most likely option that would match the client circumstances
- Consider how the charges compare to the proposed solution
- Outline why the advice is to use something different to this investment pathway option.
Grant Callaghan and Alanis Daniel