Investment pathways

If you’re a pension saver in or approaching retirement, you now have the option of new ‘investment pathways’ to help manage your money. Here’s how they work.

By Alistair McQueen, Head of Savings & Retirement at Aviva

Since 2015 ‘pension freedoms’ have offered more flexibility in how people can use their pension savings from age 55. They’ve been hugely popular, with over a million people withdrawing more than £40 billion of taxable pension savings to date 1.

One way of doing this has been regular flexible withdrawals direct from pension savings — ‘drawdown’ as it’s also known. About a third of the 670,000 pensions accessed for the first time in the year 2019/20 used this option 2. The other two thirds were people using their pension to purchase an annuity or taking their savings in one lump sum.

With drawdown, your remaining pension savings stay invested. It’s important to make sure the choice of investment funds fits your longer-term objectives. To help with this, many drawdown providers are now offering a new initiative called ‘investment pathways’ — 4 investment options, each designed for different personal circumstances.

The 4 options

Investment pathways describe the core investment options that someone using drawdown may want to consider, depending on their financial priorities 3. The options cover these potential scenarios:

  • Option 1: I have no plans to touch my money in the next 5 years 
  • Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years
  • Option 3: I plan to start taking my money as a long-term income within the next 5 years 
  • Option 4: I plan to take out all my money within the next 5 years

For each, the pension provider manages an investment plan to support that option’s objective. You may be able to select more than one option too – it’s all about matching your priorities (but check whether your provider offers this).

As with all investments, the value of your pension can go down as well as up, and you may get back less than has been invested. The different options aim to manage the risks accordingly. For example, with Option 1 the investments will have a slightly higher degree of risk, and the potential for longer-term return, than with Option 4. Under Option 4, there’ll be a bias towards lower-risk, lower-volatility investments. If you’re likely to take out all your money in the next 5 years it would be unwise to invest all your savings in riskier assets.

Can I use investment pathways?

In most cases, drawdown providers must now offer investment pathways to customers. If you’d like to find out more, contact your pension provider. 

If you’re considering using drawdown, or accessing your pension benefits in another way, we recommend that you discuss your requirements with a financial adviser.

And if you’re over 50 and would like to learn more about pension freedoms in general, you can also contact the free, government-backed Pension Wise agency. Pension Wise will not give specific advice as to what you ‘should’ do, but they’ll explain the different options for what you can do with your pension savings from age 55. Your own pension provider may offer a similar service.