The Government’s guidance service wil have to tackle savers underestimating life expectancy and should introduce “cooling off” periods if savers try to take too much of their pension pot at once, according to the Association of British Insurers.
A report published today, carried out by consultancy ideas42 on behalf of the ABI, applies behavioural economics to the Government’s freedom and choice reforms.
It says guidance sessions need to tackle issues such as people’s tendency to underestimate how long they will live, overconfidence and misunderstanding of risks. It adds the “representativeness heuristic”, such as where one bad annuity tars all annuities with the same brush, also needs to be addressed.
The report also says the guidance service, delivered under the Pension Wise brand through The Pensions Advisory Service, Citizens Advice and a Government website, needs to help people overcome their fear of financial information and encourage people to connect with their “future self”.
Other recommendations include introducing “cooling off periods” if savers try to take a certain proportion of their pot at once; more distinct categories to help savers compare different products, and a greater focus on following-up provider communications.
ABI director general Huw Evans says: “This is a must read for everyone committed to making these reforms a success and improving retirement outcomes for savers.”
Ideas42 managing director Katie Martin says: ”We know from our own lives that we don’t always make decisions that are in our own long-term best interests, and there’s no reason to believe that defined contribution pension holders will be any different.
“In fact, given the vast array of psychological, cognitive and emotional barriers inherent in making decisions about retirement, it is highly likely that many of them will make choices they will later come to regret.”