This week saw the deadline for those wanting to respond to HM Treasury’s consultation into the new freedoms and choices in pensions. These are the measures George Osborne announced at the last Budget allowing people at retirement to do what they want with their accumulated pensions – lifting the need to buy an annuity and instead allowing people to make their own choices. All very Citizen Smith and liberating, but for most the dismantling of old rules will mean that for the first time people will need to plot their own course when sorting out their retirement incomes.
To help people navigate these waters, the Budget stipulated that free face-to-face financial advice would be available to all. What he actually meant was guidance, there is a distinction, but for the sake of simplicity let’s say that George Osborne wants everyone to get help from someone independent and knowledgeable. This is all sounding great. However, here we encounter two problems. Firstly, for the most part, people in the UK are not in the habit of getting advice on their finances and secondly, how can we make sure the 400,000 people who retire each year are aware of the help available and that it’s attractive enough to engage with?
The radical option is to make people take guidance or withhold their pension, as suggested by Jonathan Eley in the Financial Times. However, such a draconian measure sits awkwardly alongside the new liberal approach to pensions. Maybe instead we can ‘nudge’ people into taking guidance applying lessons from behavioural psychology. Ethically this stands up, as ultimately we’re leading people away from potentially life(style) changing mistakes and helping them find better outcomes.
Rather than hoping people will actively seek out guidance, perhaps the way to go is to create a default option that automatically sets up a guidance meeting or call before an individual’s retirement age. A similar approach has worked at the other end of the pensions cycle where the government has successfully opted people into saving for a pensions using auto enrolment.
Alternatively, when generating awareness about guidance we might draw on people’s aversion to loss and propensity to follow the crowd. Behavioural psychology tells us that people value a £ lost more than a £ gained, so saying how much money people stand to lose by not taking guidance would be a powerful message. Or by setting ‘social norms’, showing that the majority of ‘people like them’ use guidance to understand their financial options, we can create unwritten rules of behaviour for people who are entering retirement.
Financial guidance at retirement will have to be compelled or sold. Having new freedoms without the knowledge to execute them well will have far reaching consequences. With government unlikely to force people to take help, nudging people into action becomes an attractive option.