How financial choices impact wellbeing
Carriage-clock retirement is over
A new age of retirement that includes work, love, ambition, contribution and disruption, needs financial services to match. Carriage-clock retirement is over, replaced by bespoke retirement where the retiree is in the driving seat.
The Pension Freedoms reforms of 2015 were a step in this direction, but with choice comes responsibility. We need to understand much more about the impact that financial choices have on a person’s retirement journey.
We recently commissioned Demos, Britain’s leading cross-party think-tank and an independent, educational charity, to look at how people arrive at and manage these decisions. Our aim was to understand why, with such great ambitions for retired life, so few people are taking the time to strategize, think, gather information and seek qualified advice about how to generate an income that will enable them to live their retirement dream.
The retirement income riddle
As we get older, we generally have less appetite for risk. Annuities can help offer financial stability by guaranteeing an income for life and eliminating investment and longevity risk.
And yet, Financial Conduct Authority (FCA) research shows that consumers are typically either extracting their entire retirement pot or passively defaulting into an income drawdown arrangement with their existing pension provider, without considering all their options or seeking professional advice.
Some people appear to enter drawdown arrangements without fully appreciating what it means for them in the long term. For those on lower incomes, where there is a reduced capacity for loss, data suggests that for some people, annuities have been replaced by other solutions – even though, for many, the underlying needs and wants for a financially secure future haven’t changed.
To try to understand this riddle, we explored the link between people’s experience of retirement and their income at this stage of life.
New perspectives on the impact of financial choices on our wellbeing
We asked Demos to undertake an analysis of the English Longitudinal Study of Ageing (ELSA) to explore the relationship between people’s retirement decisions and how these may be affecting their health and wellbeing.
The analysis showed that of those on lower incomes, almost one in five (19%) with drawdown said they had not enjoyed their life over the past week. This is more than double the amount for those in the same income group who bought an annuity (8%).
Moreover, those on lower incomes were more likely to say they had been “sad”, that they had felt “depressed” or “could not get going” in the past week. They were also more likely, if they had drawdown products rather than annuities, to agree with the statement “What happens to me is outside my control” and found it significantly harder to plan for the future.
For people whose income is in the lower half of the income distribution, there are significant findings regarding levels of control, planning, depressive symptoms and personal wellbeing.
When people have less of any resource, money included, the impact of its availability is felt more keenly. Put simply: if a person’s income is about £18,000, the change of £1,000 up or down (a change of 18%) would have a proportionally greater effect than an 18% change for someone whose income was £50,000.
The research also suggests that an annuity can have a positive impact, particularly for lower earners, on their wellbeing, planning and sense of autonomy. Both economic modelling studies and survey-based research suggest this may be due to the fact that annuities provide security and stability and yet they remain under-utilised.
In the face of more choice, consumers need better guidance and support to understand how the financial decisions they make can affect their retirement journey. Pension Freedoms is still settling into the retirement landscape, but it is clear that thousands of consumers are potentially choosing or defaulting into options which could be damaging not just for their financial circumstances, but for their health and wellbeing too.
In undertaking this research, we believe we’ve found an area of concern for providers and advisers to address. It provides a clear ‘red flag’ which further highlights the need to consider all income options in retirement planning and specifically annuities – particularly for those on modest incomes.
Looking at retirement planning from the perspective of wellbeing and happiness, rather than income and product, may help us to come some way to resolving the retirement income riddle.
You can download a full copy of report below
Demos report PDF size: 371KB
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 Financial Conduct Authority, June 2018. Retirement Outcomes Review: Final Review.