Wednesday, August 31, 2016

A lesson from Behavioural Finance

Behavioural Economics and Finance studies show that consumers find it hard to manage their spending. In the UK this may cause some concerns as they have moved to a program which allows pensioners a great deal of choice about how they will receive their pension. 

The issue is that the experts fear that people who choose to receive a lump sum payment when they retire, will spend it all quickly, rather than investing for the long term. This may mean that some pensioners will run out of money and be forced onto welfare.

Ms Seaton, chief executive for financial forecasters eValue, said

“I believe there is a ticking time-bomb in the UK’s new found pensions freedom. While freedoms and flexibility can be a great thing, education is vital to make sure people are saving enough for retirement, and that pensioners do not run out of money too early in retirement.”

Her comments came a week after think-tank the Social Market Foundation published a report showing that pensioners in the US and Australia have not used their pension freedom wisely, with approximately 40 per cent of them spending their pension pot by age 75.

So if people are spending their money by age 75 this is not a problem unless they are living longer than 75, which most of us are

So how can the industry and the government counter this urge to spend money. According to Martin Brown, managing partner of National IFA Continuum, said: “As a modern financial planning business, we recognise that it is our duty to educate our current and future customers on their lifetime planning needs.”

Education is the key to helping retirees understand they cannot spend all their money quickly. The question is will retiree's learn the lesson or will governments have to abandon the plan to give retirees the freedom they have know in those countries. 

I am willing to bet that the government will soon move to restrict the freedoms so that individuals do not run out of money before they die.

1 comment:

  1. Just another way of taxing the poor here in the UK - tempt them to take their relatively small pension pot in one go and the government gets more in tax and sooner too.