It will be no surprise to those of you who know me, or at least those who read some of my blogs last autumn, that I’m not the biggest fan of default investment pathways, especially when it comes to SIPPs, and most definitely when advisers are involved.
I therefore very much welcome the news that the FCA has pushed back the launch of investment pathways six months, from 1 August 2020 to 1 February 2021. While this has primarily been done to give drawdown providers more time to prepare – the time scale was always going to be tight even if we had normal market conditions – it may also be an opportunity for the FCA to rethink the whole strategy without losing face.
Default investment pathways are a concept born out of the retirement outcomes review. The FCA found too many non-advised drawdown clients were defaulting into cash and the pathways – alongside cash warnings, risk warnings and changes to disclosure – are the proposed solution.
Under the new rules, any non-advised client wanting to access tax-free cash will either need to make an active investment decision in relation to the corresponding drawdown pot or confirm they wish to continue with their existing investments – or they will be pushed towards a default pathway fund before they can access their money. Which particular default fund will be based on the client ticking one of four boxes in relation to their intention for accessing their drawdown fund in the next five years.
Anyone already making active decisions, or using an adviser, is not the prime target of these new rules but will be caught in the crossfire and will face extra hurdles to access their funds. The people who would have previously defaulted to cash, who the FCA is concerned enough about to have written these new rules to protect, will be defaulted into a pathway instead.
If pathways had been in place six months earlier than planned – starting 1 February 2020 – can you imagine the impact on someone defaulting their entire drawdown pot into one fund on one date in February or early March, and how that fund would be looking now? Compared to the person who’d accessed drawdown in January and defaulted into cash? I’m not sure those the FCA is looking to protect would have understood the rationale or felt a good job had been done.
These are exceptional times, but they highlight another real danger of default pathways for drawdown and what a different beast it is to someone paying regular contributions into a default accumulation fund.
Let’s hope the pause in the application of these rules becomes a permanent one. This would mean advisers, when advising on drawdown investment choices, won’t have to jump through the hoops of considering pathways first, and can cut to the chase of helping clients make investments appropriate to their own circumstances and risk profile.
This article was previously published by Sipps Professional
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