One of the FCA’s four ‘Investment Pathways’ options to help drawdown customers invest their pension is emerging as a clear winner, according to interactive investor, the personal pension platform.
Investment Pathway 1 – “I have no plans to touch my money in the next five years” has proven a runaway number one choice for customers of ii who have been through the selection process, with 95% of those who have invested via a Pathway so far choosing this option.
Pathway 1 is a low-cost fund with a mix of equities and bonds that provides potential for growth and maintains the same level of equity allocation (and the same risk profile) in the fund over time.
The only other option to have attracted customers so far is Pathway 3: “I plan to start taking my money as a long-term income within the next five years”, with 5% of customers holding Pathways investments choosing this option.
However overall, only a small proportion of customers entering drawdown are choosing Pathways. Of those who have been through the Pathways journey on the interactive investor platform, 6% are now holding Pathways investments.
Becky O’Connor, Head of Pensions and Savings at interactive investor, said: “It is still early days for the FCA’s Investment Pathways initiative; however our early data shows that fewer than one in ten people going through the journey have made investments via Pathways.
“Of those that have, the overwhelming majority have chosen Pathway 1. This suggests, as you might expect, that most people approaching drawdown do not plan on retiring within five years of reaching the age at which they access their pension for the first time. It could also suggest this group of soon-to-be retirees have a higher risk tolerance than might be assumed.
“But with the majority so far choosing just one option and with a very small proportion so far choosing a Pathway, this also suggests that the current choices set by the regulator might not be aligned with the circumstances of most people.”
Investment Pathways were designed to help people entering drawdown choose investments, in part to address the regulator’s concerns that people entering or in retirement are placing their funds into cash and missing out on years of investment growth in the process, leaving themselves at greater risk of running out of money in retirement.
The initiative is also designed to increase engagement with pensions and to reduce the risk of non-advised people being enticed into making potentially risky investments with their defined contribution pension.
Becky continues: “Pathways can encourage people away from the real risk of inflation eating away at their pensions if they choose to keep their retirement pot in cash. In general, the initiative serves a useful purpose, although we continue to anticipate that the majority of our customers will choose to pick their own investments for their pension.”