Everything You Need To Know About Pension Investment Pathways

Pension Investment Pathways

Not everyone knows how to make the most of their pension because they are not money minded or don’t have the help of a financial adviser.

Pensions were tough enough to manage before pension freedoms started in April 2015.

Although the freedoms make pension cash easier to access, they also push savers into making more complicated decisions about their money in retirement.

This guide looks at these investment pathways and asks if they help or hinder non-advised pension savers with their money.

What Is A Pension Investment Pathway?

The aim of pension investment pathways is to simplify how to invest your defined contribution (DC) pension pot after you have taken the tax-free lump sum once you have reached the age of 55 years old.

In a nutshell, an investment pathway is one of four off-the-peg options offering help with what to do with the money remaining in your pot.

You make the decisions depending on what your financial plans are for the next five years, while your pension provider manages the fund. The idea is you don’t have the hassle of choosing funds or shares to invest the rest of your money.

Your pension firm must offer the pathway option if you take your tax-free lump sum or flexible drawdown without consulting a financial adviser.

Choosing The Right Pathway For You

Investment pathways are for retirement savers with DC pensions.

These pensions come with no guarantees and the income paid depends on the value of the fund, which can rise or fall along with the value of the underlying investment.

The pathway plans are based on what you want to do with your money in the short term – which in financial terms is the next five years.

Don’t worry about your decision being final. It’s not. You can change your mind and provider at any time.

An important consideration is how much your pathway option will cost. Pensions don’t come with a free lunch – each option comes with a price tag and you need to know how these costs will impact your fund before agreeing a course of action.

The Five Pathway Options

Officially, investment pathways come with four options, but you can always exercise the fifth – the I don’t know choice.

The others are:

  1. I don’t want to take my money for five years and will keep my pot invested.
  2. I will set up an annuity paying a guaranteed income within five years.
  3. I will start taking a regular income or just withdraw the cash when I need it within five years.
  4. I will withdraw all my cash in the next five years.

If these options don’t match your thinking, then go for the fifth and seek more advice.

If you don’t touch your money

This could be a sensible option if you plan to keep working, have other income like rents from buy to let property or other means.

Taking cash from a pension under these circumstances could push you into a higher tax bracket.

I want to buy an annuity

The choice for someone who wants a guaranteed monthly income but remember once you have bought an annuity you cannot draw any more cash or change the terms of the deal.  

Annuity rates and the costs of setting up and running the scheme vary widely between providers, so shop around for the best deal.

Also check if your pension offers a guaranteed annuity rate – they are generally better than those on the open market.

I plan to take a regular income

If you want a guaranteed monthly income for life, then take the annuity path.

Taking a regular income or lump sums will run down your savings much quicker than an annuity. This means your money could run out sooner than you had planned.

Reinvesting the fund will replenish the fund, but this may not be as fast as you take money out.

I want to withdraw all my pension

The risk of running out of money in retirement increases with each option and taking all your pension pot early in retirement is the riskiest pathway.

Before taking the money, consider how you will pay the bills without it and any income tax implications.

Working With A Financial Adviser

If you don’t know which option is best for you, then financial advice could be good idea for you.

Financial advice will come with a cost, so make sure you find out how much is involved before making any decision.

You can get free guidance from the government’s Pension Wise website.

Pension Investment Pathway FAQ

Besides a house, your pension is probably the biggest financial asset you have.

The money must last many years in retirement – some of us retire at 55 and can live another 30 years or more.

What is an annuity?

An annuity is an insurance product designed to pay a guaranteed income for life, so you don’t run out of cash during retirement.

What is flexible drawdown?

Sometimes called flexi-access, flexible drawdown allows retirement savers to take money from their pension when they reach the age of 55. The withdrawals can be taken in several ways while leaving the rest of the fund invested.

Do I have to follow the investment pathway?

No, you do not have to follow the pathways, but your pension provider must offer the options to you.

How much tax-free cash can I take from a pension?

You are likely to have one of two types of pension – a defined benefit (DB) scheme, which is typically a workplace or public sector pension or a defined contribution (DC) scheme, which covers some workplace pensions and private arrangements like SIPPs. You tax-free lump sum from a DB pension is a calculation based on length of service and salary. A DC scheme typically pays 25% of the value of the fund.

Are there limits on my pension income?

If you have a DC pension, you can withdraw what you want, when you wish, up to the value of the entire fund. You will pay tax, o if you have a large fund you may want to spread the withdrawals to stay in a lower tax bracket.

Below is a list of some related articles, guides and insights that you may find of interest.

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