How advice can counter behavioural bias in retirees


    The vast changes in the world of pensions have focused on the technical aspects of the rule changes and how they interact with previous legislative regimes, the increasing number of auto-enrolled pension scheme members and changes to state pensions.

    We know consumers rarely engage with the world of personal finance, and less so with the even more tedious world of pensions, but ‘Lamborghini-gate’ put pensions on the map.

    Those of us familiar with the business of pensions and retirement advice know that, far from blowing pension wealth accrued over decades on a Lamborghini, most pension savers with an average pension pot of £36,300 (according to the ABI) must aspire instead to a new BMW X3, or a six-month-old Audi TT coupe with 5,000 miles on the clock.

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    The new pension freedoms have been headlined as “your pension, your choice”. If a person wishes to withdraw all their savings, spend them and then become reliant on the new single-tier state pension, that is their free choice.

    But will pension savers really choose to spend the entirety of their modest wealth on one (depreciating) asset? After all, advisers would be castigated for suggesting an investment into an asset which was practically guaranteed to collapse by 40 per cent in the first year and never recover.

    What retirees want

    Attention has turned to the importance of anticipating what consumers really will do with their pension pots. Speculation is fun, but far more important is a clear understanding of consumer behaviour, thinking about how and why they act the way they do.

    • The International Longevity Centre (ILC-UK) conducted a survey of 5,000 people aged 55-70 who are yet to retire or draw on their pension wealth. Nearly 70 per cent of those with defined contribution pensions would prefer a guaranteed income for life, while around 50 per cent wanted a guaranteed income protected against inflation.

    In contrast 7 per cent said that paying for big ticket items such as holidays or a car was most important, while 5 per cent said paying off debt was the priority.

    • Research undertaken by Nest indicates that only 7 per cent of the population plan to take their entire pension pot as cash to spend. Some 16 per cent of respondents said they wanted to convert their savings into a guaranteed income, 32 per cent said they wanted to use at least some of their savings to buy an annuity and either use the rest to invest for further income or spend as they pleased, while around 20 per cent planned to leave their pension invested and take income from it.

    • YouGov research published in January 2015 indicated that 54 per cent of not yet retired over-50s say they are interested in reinvesting the money they withdraw from their pension fund.

    However, at the same time more than seven in 10 men and eight in 10 women rate having access to a guaranteed income for the rest of their lives as being important to them, with the same numbers agreeing that having an income in retirement that grows to offset increases in the cost of living matters.