Drawdown Investment Pathways Explained: Essential Knowledge for CII Pensions Exams
Here, we delve into the intricacies of the investment pathways introduced by the Financial Conduct Authority (FCA) within recent years. We provide clear explanations of the four different options available and how they match specific retirement goals. Whether you’re preparing for a CII pensions-related exam, such as AF7, AF8, R04, or J05, or seeking a better understanding of these pathways, read on as we explore their significance, requirements, and implications on pension investments.
This article is correct as at 25 July 2023.
In February 2021, the FCA introduced investment pathways, which aim to improve retirement outcomes for customers who do not have a financial adviser when transferring pension savings either into drawdown or between drawdown arrangements.
The FCA recognised that many customers without an adviser may not fully understand the investment options available to them or the potential risks involved and so developed the investment pathways to provide customers with clear and easy-to-understand options that match their retirement goals and provide greater protection against potential investment risks.
Understanding the Four Pathways for Pension Savings
There are four pathways based on the customer’s plans for using their money within the next five years, as follows:
- ‘I have no plans to touch my money in the next five years.’
- ‘I plan to use my money to set up a guaranteed income (annuity) within the next five years.’
- ‘I plan to start taking my money as a long-term income within the next five years.’
- ‘I plan to take out all of my money within the next five years.’
The pathways are designed for customers who:
- Are 55 or older, or under age 55 and looking to access their pension due to ill health, or have a protected retirement age
- Have a defined contribution pension
- Have decided to take or have previously taken all their tax-free pension commencement lump sum (PCLS), leaving the rest of their pension invested
- Want simple, ready-made investment options managed by their pension provider
Options for Customers: Three Pathway Choices
Where a firm understands that a customer has no financial adviser, they must present that customer with three options, all of which must be presented with equal prominence:
- Option 1: Use the investment pathways
- Option 2: Select investments without using the investment pathways
- Option 3: Remain invested in their current investments
If the customer chooses an investment pathway, the firm must offer the customer a pathway that matches the category they have chosen. If the firm doesn’t have one that matches that category, it must refer the customer to a firm that does.
Personal Recommendations & Investment Pathways
The FCA has also amended its guidance to include considering investment pathways when making a personal recommendation to a client in relation to the investment of funds in their flexi-access/capped drawdown pension fund.
The suitability assessment should consider the investment pathway option best suited to the client, taking into account the client’s:
- risk profile; and
- recommended investment strategy.
If the recommended investment is not an investment pathway fund, the adviser must explain why it is a better option than the investment pathway fund available from the firm.
For further information on investment pathways, you can visit the FCA website.
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