Advisers urged to prepare for investment pathways

Advisers urged to prepare for investment pathways

Advisers have been urged to prepare for the introduction of investment pathways next year despite the new rules predominately concerning clients not taking advice.  

As part of its work on retirement this year the FCA proposed pension providers offer their non-advised customers a choice of investment pathways to meet their retirement objectives.

The FCA proposed four pathways after it found many consumers were solely focused on taking tax-free cash from their pensions and were "insufficiently engaged" with deciding how to invest funds that moved into drawdown.

The new rules are set to come into force in August next year and advisers have been urged to prepare for their introduction.

Vince Smith-Hughes, director of specialist business support at Prudential, said: "Though many of these rules predominantly concern clients not taking advice, advisers need to be aware of it.

"For example, when an adviser is making a personal recommendation to a retail client about the investment of funds in the client’s drawdown they should include consideration of pathway investments.

"This is in some ways similar to RU64 and the requirement to consider a stakeholder pension."

The proposed pathways include an option for consumers who have no plans to touch their money in the next five years and for those who plan to use their money to set up a guaranteed income within the next five years.

The regulator also suggested an option for consumers who plan to start taking money as a long-term income within the next five years and those who plan to take out all their money within the next five years.

Andrew Tully, technical director at Canada Life, said: "When making an investment recommendation to a drawdown client, advisers will need to demonstrate it is better than the investment pathway the client could have used.

"This is akin to the old RU64 rules when recommending a personal pension rather than a stakeholder pension."

Steven Levin, chief executive at Quilter's Old Mutual Wealth, said the logic behind the pathways was "hard to argue with" but warned of potential pitfalls. 

Mr Levin said: "They encourage people into an investment that is broadly designed around them and with their needs in mind.

"However, we cannot ignore the risks that go along with it, specifically fostering further disengagement with pensions, and also must not forget that for many advice will continue to be key as it will ensure a plan is tailored to their needs in retirement." 

Claire Trott, chair of the Associations of Member-Directed Pension Schemes, said investment pathways would also be an issue for Sipp providers, specifically smaller ones. 

Ms Trott said: "Most of these providers will be within the exemption of 500 or less execution-only drawdowns a year.

"This exemption gives them the option to not offer the investment pathways by directing their non-advised drawdown clients to either another provider or to the Money and Pension Service drawdown comparator tool.