FCA delays introduction of pension ‘investment pathways’ that aim to help those at retirement

Coronavirus stymies the roll-out of pathways as a means of ensuring guidance for people retiring on investment-based workplace pensions.

The Financial Conduct Authority (FCA) has announced that it will put back the introduction of the so-called investment pathways, designed to help people at retirement and entering income drawdown.

Pension providers had been looking at August as the deadline for provision of investment pathways for pension investors, but it has been delayed until February 2021 in the face of disruption to the industry as a result of the coronavirus.

The FCA came up with investment pathways as a means of ensuring guidance for people retiring on investment-based workplace pensions but not intending to take financial advice, to give them clear and simple choices as to how to manage their pension or generate a retirement income from it.

The regulator’s primary concern was around the fact that people at retirement might take too much cash out of their pension, and the risk that they would simply put it in a bank account rather than leaving it invested in the pension to continue growing free of tax.

Other risks in drawing out cash for the first time include:

• Triggering the money purchase annual allowance when you start drawing taxable income (rather than the 25% tax-free lump sum). This means you can pay a maximum of £4000 into your pension if you want to build it up again later, rather than the previous £40,000. - Steve Webb: beware pitfall of taking pension cash early
• Triggering emergency ‘Month 1’ taxation: HMRC will automatically tax the first flexible pension withdrawal as if that amount were going to be withdrawn every month that year.
  - Pension freedoms tax trap catches out up to 150,000 each quarter
• Drawing out large sums when markets are falling: if you deplete your fund in these circumstances it is very difficult for it to recover fully.
  - Ignoring market volatility could leave retirees without cash

Under the delayed investment pathways scheme, pension investors would have a choice of four ready-made solutions from their provider, designed to suit different sets of circumstances.

Tom Selby, senior analyst at AJ Bell, welcomes the delay as “a pragmatic approach” at a very difficult time for providers on all fronts, arguing that to have gone ahead would have “risked creating poor consumer outcomes”.

However, he adds that in light of recent market mayhem the FCA should think again about how the reforms should be structured: if they had been in operation when markets fell, investors “would have been exposed to significant losses, with little understanding of why they were nudged in a particular direction”. 

The announcement on the delay to investment pathways comes as pension freedoms mark their fifth anniversary.

Although pension freedoms have undoubtedly been popular among consumers over this time, concerns have been raised as to whether they are necessarily in people’s best interests.

For example, specialist pension provider Just Group highlights the fact that 43% of people who accessed their pension aged 55 did not even consider leaving it invested until they were older, according to the FCA Financial Lives report. Yet the option of topping up at a later date may be very much restricted, because the annual allowance for pension contributions is dramatically slashed once taxable cash has been drawn from a pension. 

Another concern is that people may be taking unsustainably high levels of income: Just Group also points to FCA data for 2018/19 which shows that the majority of people with pension funds of under £250,000 are withdrawing far more than the 3.5% income level that is considered sustainable by advisers.

- FCA pension figures show retirees following high-risk strategies

According to Ros Altmann, former pensions minister, while pension freedoms have been a success, education and guidance are absolutely key to good decision-making. 

She points out: “Those who use the government’s PensionWise service will make better-informed decisions and have a chance to understand the implications of taking money out too soon, how much tax they may pay, the importance of long-term planning and the complexity of pensions. 

“They may then realise why they might want to use an independent adviser to help them through the complex choices…The tax advantages of pensions are significant and many people are withdrawing funds from pensions and paying much of the money in tax, rather than leaving their fund untouched.”