Route to safer pension
IF YOU are over 55 and withdrawing money from your pension, rules being introduced tomorrow may direct you along a less risky path.
The Financial Conduct Authority (FCA) is making it compulsory for all pension companies to offer “investment pathways” and help drawdown customers take income in a safe and efficient way, even if they do not pay for independent financial advice.
Pension savers making withdrawals will be asked to pick from four objectives that should reflect the choices most will face as retirement looms:
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 a long-term income within the next five years.
4. I plan to take out all my money within the next five years.
Jon Greer, head of retirement policy at wealth manager Quilter, said growing numbers are leaving their pot invested in drawdown and taking income as needed, rather than buying an annuity at retirement. “These investment pathways should help them draw up a proper retirement plan, even if they are not
willing or able to pay for independent financial advice,” he said.
Investment pathways are designed to prevent drawdown customers from making obvious mistakes, such as leaving their money in cash year after year.
A drawdown customer who leaves their money in cash rather than a mix of assets, including shares, will get 30 per cent less income after 20 years, the Financial Conduct Authority has calculated.
Interactive Investor’s head of pensions and savings Becky O’connor said investment pathways are also designed to stop people from putting their pension in high-risk investments.
Many investment platforms have responded by recommending default funds for each of the four pathways.
For example, Interactive Investor suggests that those following Pathway 1 invest in thevanguard Lifestrategy 60% Equity fund, which as its name suggests, is 60 per cent invested in shares.
For Pathway 2, it suggests low-risk, income-producing exchange traded fund ishares Core UK Gilts ETF.
Its tip for Pathway 3 is Vanguard Target Retirement 2020, which is designed to pay money to investors who plan to retire within the next five years.
For Pathway 4, it tips the Royal London Money Market fund, which invests mostly in ultra-safe cash, gilts and bonds.
O’connor said some may struggle to choose between the four options, especially those in their mid-50s who have yet to work out their retirement plans.
“There is still likely to be some confusion and hesitation,” she adds.
Jonathan Watts-lay, director at workplace financial education service WEALTH at work, said these investment pathways are “incredibly broad” and ideally people should take independent financial advice, particularly those with larger pensions or more complicated tax arrangements.
People who do take pension advice are £47,000 better off on average after a decade, research from Royal London shows.
Investment pathways are a step in the right direction but independent financial advice could take you a lot further.