What do you think about the FCA scheme, Investment Pathways?

17 March 2021

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Question by Dave

What do you think about the FCA scheme, Investment Pathways? I am unhappy spending 3% for an IFA to provide a financial plan and the a further 1% for ongoing advice. Investment Pathways seems to be a cost effective way forward.

Answered by Nicola Crosbie

Dave, thanks for getting in touch about this – what a topical question indeed!

‘Investment pathways’ is hot off the press, only being implemented on 1st February 2021. It resulted from the post pension freedom world and the regulators worry that people will lose retirement income by making poor investment decisions, such as holding too much cash. It is aimed at anyone 55+ looking to access their benefits flexibly. You must know already what income and lump sum you need in retirement. You do not want to explore the guarantees awarded by purchasing an annuity. You want a simple, readymade, self-service investment solution. The Cost and charges must be transparent, fair, and regularly communicated. It was suggested that providers should be mindful of workplace pension legislation (maximum charges of 0.75% per annum) when setting their charging structure. As you say, it is very much a cost-effective alternative to advice charges.

The FCA’s aim was to protect consumers from undue risk, whilst supporting them to make better decisions and achieve better client outcomes. It offers a framework to access benefits without taking advice. Depending on which objective best suits your plans, an investment solution will be provided. Think of it as your ‘pathway’. The scheme seeks to accommodate and meet four broad retirement objectives in relation to income:

  1. I have no plans to touch my money in the next five years.

  2. I plan to set up a guaranteed income (annuity) within the next five years.

  3. I plan to start taking a long-term income within the next five years.

  4. I plan to take my money within the next five years.

A recent survey of 1200 non-advice and prospective drawdown users (Legal & General Investment Management/NMG Consulting, 2021) found the strongest interest in the scheme came from savers with pension pots of £30,000 to £100,000. They praised the simplicity, and nine out of ten consumers were able to align with one of the above retirement objectives.

What you must consider for your own personal pot, is firstly, do you know what your retirement looks like? Often when I meet with clients, my role is to dig deeper and unearth not only what they need in retirement, but more importantly, what standard of living they want.

Secondly, you should consider the cost of advice vs the value it could offer you. Any experienced adviser would work closely with you in drawdown to create a bespoke income plan which is open to change. Using a cash flow modelling tool, they can demonstrate if your funds will continue to meet your needs, factor in market crashes, and identify any areas of concern in achieving this. Income in retirement can come from varying sources and your pension pot may not be the most appropriate vehicle to take it from. They would consider all your assets ‘the bigger picture’.

Through regular reviews, income shortfalls are identified, and the plan is adapted to fit your needs. Value can be demonstrated by adopting a personal, bespoke service – a strategy for accessing your pension. It can also reduce the impact of sequence and longevity risk by ensuring income is drawn from the right funds at the right time, in the most tax efficient manner. Risk can be adapted to fit. This is crucial in volatile markets like we experienced in 2020. An interested and trusted advisor can work with you to ensure your funds last longer in retirement. Any best laid plans are open to change, and the flexibility of drawdown combined with an advisor input, can accommodate new directions, or changed legislation.

Recent research around ‘The Value of Advice’ (Boring Money/St, James’s Place Wealth Management, 2020) concluded:

  • Advisers offer a calming influence.

  • They help identify opportunities for you.

  • If you do not have an adviser, you spend more time doing your own research.

  • The estimated monetary value of advice is 10-30% better returns than if no advice.

It is crucial you take time to make an informed decision on the best way forward - you may be retired for as long as you worked. Longevity in pension income withdrawals is commonly underestimated.

Answered by

Nicola Crosbie

Chartered Financial Planner

With 20 years’ experience behind her, Nicola takes a coaching approach to financial advice, helping even the most nervous investors to take control of their financial situation by empowering them to make more confident, positive decisions for the future. Based in Lochwinnoch, Scotland where she is the Director of Moran Wealth Management Ltd, thanks to secure remote-working practices Nicola supports clients all over the UK.