Investment Pathways – what are they?


Article by Adele

Investment Pathways have now been introduced by the FCA in an attempt to provide retirees with more information about their retirement options. This has come in response to the number of people seeking financial advice falling below 10%, or looking at it the other way around, 90% of retirees not taking any advice. With drawdown (accessing your pension) becoming more popular (currently over 30%) the FCA felt that it was important that people had more information.

The Pathways are essentially just information about the options available to people on retirement.

Legal & General have just published data from a recent survey of over 1,000 clients looking at their initial response to the FCA’s recently proposed introduction of Investment Pathways into financial services. Here are some of the findings:

  • 60% of savers were positive about the Pathways solutions offered to them and
  • 90% found a Pathway which met their needs.
  • 33% were unlikely to change basically because “they couldn’t be bothered”.
  • 60% thought that they could make the retirement decisions themselves without the benefit of advice.
  • Of those already retired, 0ver 50% felt that the Pathways weren’t detailed enough, especially in terms of the choice of investments.

In terms of the option choices, only 10% chose Option 1 – not touching their pension pot. 24% said they would choose Option 2 (annuity purchase), but only after doing more research themselves on the annuity options. 10% said they would choose Option 4 withdraw 100% of their money, but this is only available to those with small pots. That leaves most retirees, almost 45% choosing the drawdown option.

Having said that, over a third said that they would take a multi option approach over a period of time.

There were further suggestions made about what could be added into the Pathways that would be helpful, including:

  • Annual rather than five yearly reviews
  • More information about investment fund choices, including the ethical element of investments.
  • Information about tax, especially in relation to tax free cash
  • Extended Pathways looking at other areas beyond pensions like long term care planning and estate planning.

It’s interesting that a large number thought that they could manage their investment options themselves. So, what makes these clients so confident they know what they want to do in the first place and believe they don’t need advice?

One of the reasons might lie in what are called behavioural biases.

Often people think that they make rational decisions, but these are often irrational because we are influenced by several behavioural biases such as:

  • Overconfidence: many people over-estimate their ability to make the right decisions.
  • Distrust of professionals: the value of expert advice is often underestimated.
  • Information bias: reading fake or misleading news.
  • Loss aversion: fear about short-term losses may result in overly cautious decisions.

Its only professional Financial Planners who can really make a difference in helping people with their investment decisions and long-term planning. However, overall, this research by Legal & general does seem to indicate that the introduction of the Investment Pathways has had a generally positive impact and has started to go some way towards helping people understand their options more clearly.

That’s got to be a good thing.

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