In Focus: Vulnerability  

Beware the cookie-cutter pension pathways

Andrew Megson

Andrew Megson

Is a generic, “cookie-cutter” approach appropriate for protecting people’s hard-earned retirement savings?

It would appear that the Financial Conduct Authority believes it is.

Earlier this month (January), the FCA unveiled its Investments Pathways initiative – an offering to ensure adults with a drawdown (or entering into a drawdown) account have access to free guidance on their pension investments. 

In short, savers will be asked to put themselves in one of four broad groups: “I have no plans to touch my pension in the next five years”; “I plan to set up a guaranteed income (annuity) within the next five years”; “I plan to start taking income within the next five years; or “I plan to take my money within the next five years”. 

Depending on their selection, the individual will be pointed in the direction of one of four “investment pathways”.

In theory, free guidance should be celebrated throughout the retirement finance sector. After all, many individuals lack direction when it comes to their retirement finance.

More than two-fifths (42 per cent) of UK adults aged 40 to 67 have no clear retirement strategy, according to recently research from My Pension Expert. 

However, I have my reservations regarding these latest developments. I think, firstly, it lacks flexibility.

This form of cookie-cutter guidance is not based on any in-depth knowledge. It lacks flexibility and fails to take into account an individual’s full financial situation.

The onset of Covid-19 has dramatically changed people’s employment status; My Pension Expert’s aforementioned research revealed 9 per cent of Britons aged 40 to 67 were forced to take early retirement as a consequence of the pandemic.

Particularly in the current climate, savers need flexibility and an intrinsic knowledge of the retirement industry to adjust their finances accordingly. And arguably, only a regulated financial adviser is capable of offering this specialised support.

Generic guidance, on the other hand, is too regimented for individuals to bend any suggestions they receive to address a set of rapidly changing circumstances.

I also think they offer inadequate protection.

Savers who embark on the non-advised route to retirement could ultimately be jeopardising their savings. After all, a regulated financial adviser is obligated to reinstate a client’s original financial situation if their advice leads a client’s pension savings to lose value. 

Guidance does not offer the same level of protection. So, savers could essentially be lured into a false sense of security and put the prospect of a financially secure retirement at risk — and in the current economic climate, few savers can afford to do so.  

Yet, despite the protections offered by independent financial advice, many savers are still reluctant to accept it.  

It also seems these pathways risk changing the advice narrative.

Some adults believe that advisers are untrustworthy, too expensive, or both. Such assumptions are likely informed by the lack of transparency surrounding adviser fees.