Pension freedom day in England is getting mixed reviews

In England, pensions freedom gives retirees complete control over their retirement income options.   So this should be good news as people will have some control and conventional economic theory states that people will make rational decisions about their money. 

However, Behavioral economic theory shows that people don't make rational decisions. What  does influence behaviors around money?  According to the paper in this month's Journal of Political Economy  .it is in our genes. A new study of twins has found that people are genetically predisposed to save or spend the money they have, regardless of their wealth, sex or upbringing. One third of our behavior when it comes to money is explained by natural factors, rather than being someone's choice to consume or save earlier in life. 

According to Barclays head of behavioral investment philosophy Greg Davies thinks there will be trouble on the horizon for many.

"When we look at the pension world and what has happened to it over the past few years – and indeed, what is about to happen – from our perspective, what is happening is very strong behaviorally."

Davies, who has written Barclay's' latest white paper Humanizing Pensions on the topic, says auto-enrollment was put in place to combat the notion that people do not do what is in their own best long-term financial interests. 

"We think something such as auto-enrollment is absolutely crucial because it prevents people from being in a situation which is just terribly wrong for them. 

"But we also think it is not the whole solution. If you put someone in a default, one-size-fits-all solution, it gives them the impression that someone has thought about this for them. It disincentives people to engage any further. It has unintended consequences.

"The pension changes that are coming make very different behavioral assumptions." 

He adds: "If automatic enrollment is there to say 'if people are left to their own devices, they don't necessarily do what is best for them', then freedom of choice interestingly gives the impression that in the intervening decades they have magically acquired the ability to process huge amounts of information and make complex choices in the right way for them.

The reality is there is a need for foresight – that is, care in providing for the future. But the fear is by behavioral economist is that many people will spend all their money at once showing little foresight.

Freedom is not licence. Just because people have the freedom to spend their pensions as they please does not mean they have licence to spend their money unwisely.

It is lazy thinking for people to think that advice is not important, or that the adviser community is simply out to feather its own nest.

My hope is that more and more people will realize that they owe it to themselves to make good decisions about their retirement income, because if they get it wrong the only people who will lose out will be themselves and their families. To do this they need to be educated and without the education about long term planning, investing and the new rules, many will follow their genes and this may cause problems later.