More that 20,000 workplace savers have accessed Legal & General new guided retirement planner since it was launched at the end of last year.
Around a third (35 per cent) of these savers are looking to retire immediately or within the next year, while a further 32 per cent are looking to retire within a five year period.
This tool which is available to Legal & General 5.5m DC workplace members, offers tailored support aimed at helping people better understand their decumulation options, and so improve retirement outcomes.
The support is based on member insights, data analysis and behavioural science. The planner guides members through six simple steps: setting lifestyle goals, understanding financial health, setting income goals, exploring retirement options, taking action to meet goals and adjusting the plan.
This new tool is launches as research by L&G shows retirees could be at risk of outliving their pensions, by as much as 10 years, if they spend too heavily in the early years of retirement – in a behavioural trait known as “the lottery effect”.
L&G says that having overnight access to large sums of money can trigger a psychological rush which can spark impulsive or unsustainable spending – similar to winning the lottery. At the same time many people underestimate how long retirement lasts, and the reality of needing to make this money last for decades.
With the average life expectancy of a current 60 year old in the UK sitting at 86, some retirees could be left with a nine-year shortfall between their retirement funds running out and the end of their life if they take large cash lump sums from their pensions in the early years.
Sudden access to large sums of money can change how people plan their finances for the future, with one in seven (15 per cent) respondents in this survey saying they felt like the cash lump sum from their pension was an unexpected financial bonus, rather than part of their long-term savings plan. A further one in 10 said it felt like a payday, and they wanted to spend it.
Over a fifth (22 per cent) said they took out a cash lump sum — or would consider doing — so because they wanted to put it into a current account or cash Isa to keep for a rainy day, and almost half (46 per cent) said they accessed the cash simply because they could, just to have it to hand.
L&G points out that such action can result in unexpected tax bills and may mean people lose entitlement to means-tested benefits, in addition to missing out on the potential rewards of keeping their pension invested.
L&G’s research found that on average, people have £87,500 in their retirement pot before they start accessing it. A third (32 per cent) of people will take a cash lump sum once they are eligible to do so, on average at age 60. Those that access cash from their pension typically take out 25 per cent of their pot – the maximum allowance that people can access tax-free – and typically take an average income of £875 per month once they reach state pension age.
The research also found that one in seven (14 per cent) who have accessed cash from their pension revealed they have regrets about doing so, or spent more than they planned. Among these respondents, 29 per cent had unexpected costs to cover, and 26 per cent felt they could afford it at the time.
A further one in seven (15 per cent) said that since taking a lump sum, they have become more concerned about outliving their remaining pension savings.
The majority (58 per cent) of those surveyed accessed their pension without seeking any formal advice or guidance from their pension provider, an adviser or from support services like MoneyHelper. Among those with spending regrets, more than one in 10 (11 per cent) admitted they didn’t fully understand the impact of their decisions.
L&G head of DC clients Jayesh Patel says: “Far too many people are reaching the age at which they can access their retirement savings without having the support and tools they need to help make informed, long-term decisions.
“Our Guided Retirement Planner provides tailored feedback on the options available for members to achieve their retirement goals. By using the power of technology, our aim is to get members thinking about their finances holistically and building a long-term plan that works for them.”
Commenting on the findings, research partner Dr Emma Hepburn, a clinical psychologist says: “Our biases can influence what we do with our money, potentially resulting in inadequate planning for the future or making us more likely to spend too much in the here and now. As this research shows, if we view our money as a reward or bonus, we may be more likely to spend it, which can lead to what has been dubbed ‘the lottery effect’.
“Perceptions of risk also often come into decision making, and we tend to favour decisions that feel more certain. As a result, we can feel that having or using money in the here and now is less risky than waiting to access it, even though this may actually create more risk for our future selves.”
