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James Lloyd: What makes a good retirement?

James Lloyd

What makes for a good retirement? This question is more important than ever given the freedom and choice reforms, and the new options for those with defined contribution pension savings.

Underpinning these changes is a profound intellectual shift in UK pensions policy: the Government should be neutral as to what people do with their pension savings, and pensions policy should not be biased toward people receiving a guaranteed income in retirement.

We know from international experience of ‘voluntary annuitisation’ systems that few individuals opt for a guaranteed income over cash. If this eventually becomes the norm in the UK after freedom and choice – and there is no logical reason to think it wil not – what will be the consequences for people’s retirements?

To answer this question, the Strategic Society Centre recently undertook statistical analysis of retirees with a private pension income in the ‘English Longitudinal Study of Ageing’ household panel survey. This explores the associations between level of secure income, level of non-housing wealth, and people’s wellbeing and experience of retirement.

Regardless of the level of someone’s financial wealth, we found that level of guaranteed income is significantly associated with various aspects of wellbeing and leisure. These include going to the cinema, reading a daily newspaper, taking a holiday, participation in community groups and other civic activities. Income is also associated with how people feel about their life, and whether they report “the conditions of my life are excellent” and “I have got the important things I want in life”.

The research suggests an average DC pension saver would be likely to have a better retirement if they seek to maximise their level of guaranteed income. Although retaining DC pension wealth as savings or investments may provide some level of compensatory wellbeing, the total effect of guaranteed income is stronger than wealth in many of the domains identified in the research.

In addition, if an individual with DC pension savings cashes in such savings and proceeds to spend down this wealth, the wellbeing effect resulting from this wealth will decline commensurately. In contrast, the positive influence on retirement resulting from higher levels of guaranteed income is constant and lasts for the entirety of someone’s retirement.

Overall, the findings suggest that if private pension incomes across the older population decline following the freedom and choice changes, this will likely lead to a reduction in levels of wellbeing among the older population.

To prevent this happening, the Strategic Society Centre has put forward a set of policy recommendations building on the research:

  • Actively promote receipt of a guaranteed income in pension policy to improve the wellbeing of retirees
  • Educate savers about the role of a guaranteed income in a good retirement
  • Include information about the importance of a guaranteed income for wellbeing in retirement in guidance and information from Pension Wise
  • Ensure receipt of a decent, guaranteed retirement income is the default option for DC pension savers
  • Undertake regular research into the effect of the April 2015 changes on older people’s wellbeing

James Lloyd is director of the Strategic Society Centre

You can download a copy of Income, Security and Wellbeing here.


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Well I’ll be damned, a think tank funded by insurers (something they omitted to disclose in this article) thinks that people are happier when they have annuities than when they control their own money, and therefore we should make everyone buy annuities again.

    Why, if a guaranteed income results in greater happiness than the equivalent wealth, do they not propose making people with ISAs and other non-pension savings buy an annuity? Because they’d be laughed out of town. Why aren’t we laughing them out of town for suggesting exactly the same with pension savings? Inertia. No good reason. Give it another 10 years.

    • Hi Sascha,

      Thanks for your comments. Nowhere does the article say “we should make everyone buy annuities again”, so am not sure why you refer to this. There are lots of different ways a regular, guaranteed income can be provided besides a traditional annuity. The article is making the point that – given evidence guaranteed income has a more positive effect on wellbeing in retirement than savings, etc. – there may be a role for government to nudge people toward receipt of a guaranteed income. I think most people would find that pretty uncontroversial, and its already observable in the thinking of Nest and their recent ‘blueprint’ document.


  2. “The research suggests an average DC pension saver would be likely to have a better retirement if they seek to maximise their level of guaranteed income.”

    Surely that sentence is implying a client should forget about any of their personal circumstances, e.g. poor health and then just buy a single life, annually in arrears annuity with no spouse’s option, guarantee period or indexation?

    Load of nonsense.

    • Hi Jamie,

      No, that sentence is implying none of those things.

      The sentence is conveying that since a guaranteed income appears to have a stronger correlation with levels of wellbeing in retirement than levels of savings, etc., a typical person will probably have a better retirement if they use wealth for some form of guaranteed income.


  3. What makes a good retirement?

    As one on the cusp I can answer the headline question with some certainty.

    Short answer: Plenty of money.

    Longer Answer: An underpinning of a secure, risk free guaranteed income for life that will meet all basic expenses. Thereafter a decent slug of cash at least equal to 18 months expenses. Then a decent portfolio of ISAs and bonds to:

    a. Provide additional tax free income
    b. Provide an emergency pool on which no CGT on ISAS and tax planning scope on the bonds.

    Finally some type of remunerative part time work to enhance cash flow and keep the grey cells from atrophying.

    All linked to the absoluter minimisation of tax.
    Naturally decent health is also an essential requirement and if possible a subscription to a good PMI scheme will be invaluable to that end.
    Have I missed anything?

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