Unintended consequences of auto-enrolment will increase the risks of retirees making poor decisions when given the freedom to access their pension pots from April, according to Barclays.
A white paper published this week by Barclays’ behavioural finance and corporate and employer solutions teams says auto-enrolment discourages engagement as consumers feel decisions are being made for them.
The paper says: “The biggest concern [of the pension reforms] is that people will not balance the spending now versus spending later trade-off, and spend their pensions too quickly.
“There is also the risk that too much choice could overload people and put them off finding a good solution. Given more options people are less likely to make a decision at all, let alone an informed decision.
“All these potential problems stem from the risk that, due to auto-enrolment, most employees will simply not be engaged enough with their retirement planning to make the sort of decisions required without assistance.”
The report also raises concerns about the effectiveness of the Government’s guidance guarantee service, as it argues the guidance needs to be personalised.
Guidance sessions will discuss the relevant options for retirees, but cannot give a personalised recommendation as this would stray into regulated advice.
Barclays head of behavioural finance Greg Davies says: “A lot of people’s reasons for taking retirement income a certain way are emotional. For instance, people place a large emotional premium on flexibility so are likely to choose drawdown over an annuity even where that is detrimental.
“Guidance needs to be personalised to get individuals to the right answer. If it only shows people the different options and their advantages and disadvantages, that will scare the living daylights out of them.”
The paper argues that only independent financial advice will give consumers the “tailored discussion” most will need to make the right decision.