• 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.
Of most interest for the adviser community, the YouGov research found there to be very little variance in these numbers across income groups.
So there is clear evidence that consumers are not intending to blow their pension funds - and that they very much prefer the lower risk and guaranteed options, whatever their age and wealth. So why are consumers so averse to annuities and lower-risk, longer-term strategies in practice, in spite of everything they told the researchers?
Understanding behaviours
Understanding how a client makes their financial decisions and the flaws that can lead to making poor financial decisions will help improve the advice and product design process.
The first occasional paper published under the Financial Conduct Authority (FCA) in April 2013, ‘Applying behavioural economics at the FCA, is perhaps the best indication of how seriously the regulator takes this subject.
This document highlighted that “people often make errors when choosing and using financial products, and can suffer considerable losses as a result”. It suggested advisers “can understand how these biases can cause people to misjudge important facts or to be inconsistent”.
Present bias
Perhaps the behavioural bias most relevant to the retirement decision-making process is present bias. People live in the “now” and prefer immediate gratification, valuing the present over the future.
The decision to take the full 25 per cent tax-free lump sum entitlement on retirement is a rational decision, rather than demonstrating a lack of consideration of the impact on future spending.
