The 'investment pathways' that could drain your pension
So-called investment pathways were meant to make it easier to sort your finances for retirement and avoid costly mistakes.
But we've found choosing the wrong pathway could take a big bite of your pension.
We compared the costs of pathways from pension providers and investment platforms.
Alongside huge cost differences, we found a confusing mess of charge figures, making it difficult for people to shop around.
Here we explain how pathways should work, what's gone wrong, and how to pick the right one.
Why pensions need pathways
When you retire, you'll need to decide how (or indeed whether) to access your pension savings.
Pension drawdown, where you keep your money invested and take income as and when you like, has become more common over the past decade than taking out an annuity, which provides guaranteed income throughout your retirement.
It has some potential downsides. Drawdown puts your retirement savings at the mercy of the markets, which can spook investors who are less experienced. And if you don’t get financial advice, it will be up to you to manage your investments and decide what’s a sustainable level of withdrawals each year.
Less-knowledgeable pension savers have tended to put their money into cash when opting for drawdown, which defeats the point of choosing an investment product.
The Financial Conduct Authority (FCA) was concerned that pension drawdown customers who didn’t get advice were making poor decisions. So in 2021 it introduced a range of ‘investment pathways’ to provide four simple, good-value investments that could match retirees’ financial goals.
All four options come with their own nominated investment fund that’s chosen by the provider on your behalf. You can also choose to keep the money invested in existing funds or invest in new funds you’ve picked yourself.
The 4 investment pathways
| Pathway | Average customer take-up | Average total charge (a) |
| 1 - No plans to touch money within next five years | 33% | 0.52% |
| 2 - Plan to use money to set up guaranteed income (annuity) | 4% | 0.47% |
| 3 - Plan to start taking money as long-term income (drawdown) | 35% | 0.54% |
| 4 - Plan to take all money out within next five years | 28% | 0.45% |
(a) Combines fund and provider charges (correct for a pot of £250,000), varies with pot size
The £12,000 charge gap
Crucially, you are not tied to a particular provider or pathway and can switch to another or select your own funds at any stage.
Given that it's likely you’ll be investing a large amount of money for several years, it’s important to compare provider fees. High fees will reduce returns in good years and make market dips more painful.
In November 2023, we looked at what 20 providers charged for someone with an initial pot of £250,000 going into drawdown via the different pathways. We assumed annual investment growth of 3% before charges are deducted.
Most firms we asked told us Pathway 3 was the most popular option among their customers. After five years, you’d have £12,139 less with the most expensive provider (Prudential) than if you invested your money with the cheapest (Interactive Investor).
After 10 years the difference in pot size mushrooms to £27,257.
It’s a similar story with the other pathways with companies applying a wide variety of total charges.
Highest and lowest pathway fees
We asked Prudential about its high fees, and it said that its customers get a 'smoothed investment experience'.
Smoothed funds involve the value of the fund changing by an expected growth rate, based on long-term performance, so you’re less affected by the frequent troughs of stock markets – but you’ll also miss out on the peaks.
Too difficult to compare costs
The problem with pension drawdown is that it is very difficult to compare charges. This is particularly the case if you add in the pathway fund charges which vary markedly. There aren’t really any tools that allow you to do so.
When we previously looked at 30 providers in 2023, we found 12 different charging structures combining fixed, percentage and one-off administration fees.
Providers’ charges for a typical pot of £250,000 range from 0.06% to 0.52%, but that usually doesn’t include fund charges.
Expensive fund charges can easily outweigh the benefit of low provider charges; fund charges for pathway 3 varied between 0.05% and 1.01% in our analysis.
Our compare drawdown charges guide shows both pension drawdown platform charges and the impact of fees if you opt for pathway 3.
- Find out more: compare drawdown charges
Do you need financial advice?
The investment pathways were devised for people who don’t take advice before switching into pension drawdown.
Using an adviser isn’t just about securing the best product, but also about formulating the appropriate strategy to have a comfortable retirement.
There is evidence that retirees worried about running out of money might be reluctant to make sufficient withdrawals and end up ‘living below their means’. This might mean that you end up with more money to pass on as an inheritance, but without having fully enjoyed the retirement you saved for.
A regulated financial adviser can address this issue by looking at your overall financial situation and goals for retirement, rather than what you want to do with a particular pension pot. Independent financial advisers can provide the widest range of services, but they can be expensive.
Some investment platforms offer one-off advice sessions for £300 to £600, which can help you begin to work out a financial plan.
