The notional split means there’s no need. They just pay out from the cash and the notional investment split is updated.
This creates problems with pathway investments. Our individual now has a drawdown pot worth £49,000, but still has a pathway investment worth £50,000 – which the FCA’s proposed rules insist is labelled in such a way that it is directly associated with the individual’s drawdown plans.
The potential for confusion is obvious, and this is just a basic example.
When you consider that similar issues are created by multiple other events (e.g. further contributions, or even later crystallisations where the individual chooses not to go into the pathway investment on that occasion) the value of the drawdown pot and the valuation of the pathway investment will potentially become seriously out of whack very quickly.
The FCA’s proposed solution is to allow the whole Sipp to go into the pathway investment when someone partially crystallises, not just the drawdown pot.
However, from a customer outcomes perspective this does not work – it cannot be right for all of a £500,000 pension to be put into a pathway investment because that option has been deemed suitable for the £30,000 of that pension which has been put into drawdown.
Issues are also created as soon as the individual decides to sell some of the pathway investment for purposes other than taking benefits.
So let’s just tell providers they have to move away from the “notional split” option? Easier said than done when you consider back office systems, some provided by external parties, have been developed for two decades to work in a fundamentally different way.
Re-engineering those systems will take a long time and cost a lot of money.
It is also unlikely to be possible to use multiple systems for different groups of drawdown customers, which potentially means tens of thousands of existing drawdown customers, and their advisers, getting used to a new way of investment allocation.
It will be interesting to see how this challenge is addressed when the rules currently being consulted on are finalised.
Gareth James is head of technical at AJ Bell