So what is Investment Pathways – when somebody accesses a pension via drawdown
Since the Introduction of Pensions Freedom in 2015, the way of accessing a DC pension has completely changed. With the aim of giving people more flexibility.
Beforehand, you would had to buy an annuity through a pension provider. But now you have a choice to access according to your retirement income needs.
As part of initial findings by the Financial Conduct Authority (FCA). It became apparent that most people where investing funds not yet accessed within a simple cash account. Which may have not been in their best interests towards sustaining or improving their remaining funds ahead of accessing.
Hence the introduction of Investment Pathways in February 2021. It was designed to help people access their pension pots in a much better manner over the future years.
The FCA also wanted more people to become more involved within the funds held within a pension, and provide better outcomes so pots wouldn’t be eroded by inflation or poor investment choices.
Why was this an issue for individuals ?
1) Normally cash funds may be seen as somewhat low risk, and they will go up and down in value. Unfortunately, not as much as growth funds or individual companies.
2) These funds don’t normally match current levels of inflation. So your buying power at a later date is being eroded.
3) You could miss out on future growth and returns when the stock market is performing well.
So how does Flexible access Drawdown work ?
Initially with a Defined Contribution pension you can take 25% tax free of the pot value, under normal scheme rule. The remaining funds are then invested within the pensions wrapper.
People then access the funds as and when they wish according to their income needs and financial circumstances. So an individual would normally make choices as to where those investments or funds are held.
The purpose of Investment Pathways was to help people who enter FAD and don’t use a Financial Adviser.
So how will the introduction of Investment Pathways help such people ?
The idea is relatively simple, if you access any remaining funds on your own terms and conditions.
You can now choose or select a pension provider that offers 4 Investment Pathways.
You can then select the appropriate pathway for all or some of your money according to your attitude to risk. Along with the timeframe when you access the money over the coming years.
So what are the 4 Investment Pathways ?
1) I have no plans to access any money within the next 5 years.
What this means :
* I want to invest money for 5 years at least.
* If my plans do change, I have the option to make withdrawals but I will have to consider which investment option is right for me.
2) I plan to use some of the funds to set up a guaranteed income (Annuity) within the next 5 years.
What this means :
* I would like a guaranteed income for lifetime or a fixed term period.
* You plan to buy an annuity within the next 5 years
* My plans may change, I can consider if this option is right for me, but once I purchase an annuity it cannot be changed.
3) I plan to start drawing my money as a long term income plan within the 1st 5 years.
What this means :
* I would like to set up regular or occasional income withdrawals straight away or within the next 5 years.
* You would like to take these withdrawals over a longer period say 10 or 15 years or through their complete retirement.
* The income though isn’t guaranteed and investments still in the pot will go up and down in value.
* If my plans do change, I again have the option to reconsider if this investment option is right for me.
4) I plan to withdraw all my funds within the next 5 years.
What this means :
* I plan to access the funds within a short timeframe, to possibly enjoy the enjoy years or bridge gap before other pensions may become payable.
* If my plans do change, I don’t have to take all my funds out within that timeframe, but I may have to reconsider if the investment option is right for me in the short term.
What if I don’t use the Investment Pathways tools on offer ?
You don’t have to use the Investment Pathways tools on offer, you can pick and choose your own investments. Or you can stay invested in your existing funds. Unfortunately through, when people are building up a fund through the accumulation stage they are automatically enrolled into a default fund. Some people have never made any real decisions with regard to where they invested their regular contributions.
- The first step is to speak to your current pension provider and see what investment products they offer if you do choose Flexible Access Drawdown (FAD).
Key questions to ask may include:
* What is the timeframe to implement the FAD process, it’s quite simple and should only take a few weeks.
* Consider what investment funds are on offer and available.
* What fees and charges apply, is there a fee every time you make a withdrawal, and what management fees apply to run that account.
* What is the frequency and restrictions on access, some providers may say a minimum of £ 1,000 for each lump. Or limit how may lump sum withdrawals can you make each year.
* Consider, what are the income tax implications applicable are. As any income you draw will be taxed at source by your provider and would be added to any other income you receive in the tax year.
* Normally they will apply month 1 emergency tax on the 1st withdrawal which they can rebalance on your behalf or you can reclaim via gov.uk in a much quicker timeframe, normally around 30 days.
* Most people suffer from inertia and may stay with that pension provider as they may have been with them for many years but you can shop around, you don’t have to stay with your own provider.
* Pension providers will normally write to individuals on an annual basis when providing annual statements with booklets or literature about the products they offer and the terms and conditions of those products.
* They will normally have video guides, FAQ sections, tools and calculators on their websites, so take advantage of the help available so when you do speak to your provider you will have an idea of what sort of questions to ask when implementing your plan.
Where can I find out greater information ?
Moneyhelper.org.uk which is a government approved website, as part of the Money & pensions Service which has great a section about how FAD works and the following comparison tool is available to help people shopping around: investment pathways comparison tool as part of the Moneyhelper.org.uk website
If you found the above information useful, or wish to look at other blogs posts about pensions, check them out on www.moneyminted.co.uk
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