PRESENTATION TO COME Pension Freedom Day in the U.K.: Examining Pension Decisions Cäzilia Loibl, Leeds University Business School & Human Sciences, The Ohio State University
Current Research Projects Designing evidence-based communication for older adults in financial distress Collaborators: Wändi Bruine de Bruin, Barbara Summers, Simon McNair; Leeds University Business School, U.K. Funding: Marie Curie Fellowship, European Commission Aging in place: Analyzing the use of reverse mortgages to preserve independent living Collaborators: Stephanie Moulton, Don Haurin, The Ohio State University Funding: MacArthur Foundation, U.S. Department of Housing and Urban Development
Current Research Projects Testing strategies to increase saving and retention in the U.S. Assets for Independence program Collaborators: George Loewenstein, Carnegie Mellon University, Emily Haisley, Barclays Bank PLC, Lauren Jones, The Ohio State University Funding: FINRA Investor Education Foundation; U.S. National Poverty Center; William and Flora Hewlett Foundation; Annie E. Casey Foundation; U. S. Department of Agriculture Hatch Grant program Connecting saving and food security: Evidence from an asset building program for families in poverty Collaborator: Tasha Snyder, The Ohio State University Funding: U.S. Department of Agriculture/University of Kentucky Center for Poverty Research
Pension Freedom Day: 6 April 2015 As pension minister Steve Webb said after the freedoms were introduced, you can go out and buy a Lamborghini if you want. Webb raised the prospect of people in their 50s and 60s splashing out on the Italian sports cars, which can cost over 300,000, amid an intense debate over Osborne's decision to introduce the most far-reaching reform of the taxation of pensions since 1921. The Guardian 20 March 2014, 4 April 2015
Pension Freedom Day: 6 April 2015 I think this is fantastic, that now I can just take a lump sum and the money that I get, I can do whatever I want with that money We might get a new little car, get a smaller car. So might use it not all of it, but some of it for that, and then I ll invest the rest for a couple of years to see how we go. Consumer Interview 12 27 February 2015
Pension Freedom Day: 6 April 2015 1. Flexible access to pensions from age 55 Total freedom over how they take an income or lump sum from pension - Take whole fund as cash in one go, 25% tax free, rest taxed as income - Take smaller lump sums, 25% tax free, rest taxed as income - Take up to 25% tax free and a regular taxable income from the rest 2. Access to impartial guidance Pension Wise - Provided by Citizens Advice Bureau, Pension Advisory Service 3. Restrictions on how much to contribute to private pensions after withdrawals 4. 55% pension death tax abolished 5. Death after buying an annuity: tax cut 6. Transferring a DB pension 7. Retirement ages to increase from 55 to 57 from 2028 on 8. Contribution allowance increase for 2015/16, additional 40,000 9. Contribution restriction for high earners from 2016/17
Pension Freedom Day: Challenges Low financial literacy among the older population Questions about inflation, risk diversification, compound interest; low levels especially among women, with regard to (Lusardi 2012) Estimating life expectancy correctly Generally, expectancy to live to 75 or 85 close to average probabilities in the population (Hurd 2009) If underestimated by only 4 years, only state pension remains, resulting in average replacement rates of less than 50% (Brancati and Franklin 2015) Focus on financial pressures of the moment, neglecting financial planning Self-control and financial planning skills needed to preserve savings (Mullainathan and Shafir 2009); current evidence of defaults from U.S. reverse mortgage market Materialistic orientation in society Materialists think they will be happier through buying consumer goods, but rarely are, and often regret it (Richins 2004)
Pension Freedom Day: Research Questions 1. What is the percent of people who decide to take a lump sum payout? 2. What is the percent that is planning to blow the pot? 3. How to lump-sum takers differ from those who don t plan to take a lump sum? 4. What are the characteristics of people who are unsure about taking a lump sum? 5. How are lump-sum takers planning to use lump sum payouts?
Pension Freedom Day: Data Collection Survey of U.K. residents aged 55 to 75 through Research Now, a commercial online panel Data collected about 6 weeks after Pension Freedom Day, 18 to 22 May, 2015 503 completed responses On average 64 years old, 53% male, 79% married or living with partner, 2 household members, 48% retired, 54% postsecondary degree, 38,339 household income, 133,962 liquid household savings, $4,309 debt, 92% homeowners On average 2.39 pension pots, 58% Defined Benefit plan, 22% Defined Contribution plan
5 Pension Freedom Day: Results What is your priority for your money during retirement? Please rate the following items from 1=very unimportant to 5=very important. 4 3 2 1 Security Lifelong income Max. income Decision power Access Good time Inheritance Blow pot 0 3.7% plan to use funds to have a good time 1.6% plan to blow-the-pot.
Pension Freedom Day: Results Would you like to take a lump sum from any of your pension pot(s)? 0.6% 18.5% 45.4% 35.5% Yes No Don't know Prefer not to say 45.4% percent of respondents plan to take a lump sum payout. The average amount is 33,741.
Pension Freedom Day: Results Parameter estimates and odds ratios from binary logistic regression of lump sum take-up (yes or no) on present-biased focus, financial literacy and other explanatory variables (n=407), 5 imputations Variable Model w/o demogr. variables Model with demogr. variables Odds Ratios Odds Ratios Financial literacy Pension knowledge question +35%*** +30%*** Simple planners -1% -8% Readiness to access & decide +72%*** +71%*** Subjective expectations Yrs. in retirement -3%* -3% Present bias Goal to have good time +14% +12% Goal to blow pot +29%** +29%* Material orientation Materialistic values +36%** +34%* Decline in living standards in retirement -25%** -31%** Demographics Age in years -4%* Married or living w/partner +83%* Number household members -27%*
% 40 Pension Freedom Day: Results What do you plan to do with the lump sum payout? Please tick all that apply. 30 20 10 Go on holiday, travel In savings account In easily accessible savings account Renovate, improve home Enjoy life while you can Invest in financial markets Purchase car Support children Repay debt Support grandchildren 0 Other plans 4.4%; Purchase a home for yourself 2.6%; Purchase a home for buy-to-let, 2.6%; Don t know, 1.3%; Prefer not to say, 1.3%; Spend it all right away, 0.4%
Financial Distress in Older Age: Mental Models What barriers do older adults in Europe face for making informed financial decisions? Mental model interviews with 45 adults aged 65 and older Residents of Germany, the Netherlands, and the U.K. in 2014 and 2015 Examples of challenges to pension literacy, voiced in our Dutch interviews Understanding the technicalities of pensions Not reading information well More clarity at beginning of work life Annual pension statement during work life provides only basic information Lack of data on pension savings: This will be your monthly pay Assumption that income in retirement is about the same as work income Miscalculating pension contributions (stopped worked too early) Suspicion that pension calculations is incorrect (too low) Two to three-month gap before pension starts (needed stretch loan ) Keeping up with changes to government savings vehicles (annuity product) Dealing with investment risk of private insurance
Financial Distress in Older Age: Three-Country Survey Confirming mental model interviews through a survey of older adults in Germany, the Netherlands and the United Kingdom in October 2015 Predictors: Objective and subjective debt burden Moderator/Mediators: Family support Food security, material deprivation Financial literacy and management skill Loneliness, depression, coping strategies Outcomes: Physical and mental health Collaborators: Wändi Bruine de Bruin, Simon McNair, and Barbara Summers Centre for Decision Research, Leeds University Business School, U.K.
Financial Distress in Older Age: Indebtedness in Germany Collaboration with Creditreform Boniversum for their Summer DebtorClimateIndex Germany data collection. Predictors: Borrowing and Purchasing behavior Moderator: Debt burden Attitude toward debt Financial planning Coping style Outcomes: Health Subjective well-being Life satisfaction
Financial Distress in Older Age: Indebtedness in the Netherlands
Financial Distress in Older Age: Reverse Mortgages Taxes and insurance default, time until default (Cushman 2011) Current projects: Survey of older adults who received counselling for a reverse mortgage Field experiments of post-origination financial-literacy interventions
Highlights Pension freedoms in the U.K. Allow older adults to decide about the use of pension savings. Survey results support challenges voiced in policy debates: underestimating life expectancy, present bias, materialistic focus Pension literacy is higher among lump sum takers Mental model interviews Identify key challenges of financial decision-making in older age: family support, financial management skill, psychological strength They are expected to influence mental and physical health Panel and cross-sectional surveys Insights into economic and medical facets of indebtedness in older age Collaboration with credit reporting agency; longitudinal aging study Reverse mortgages Increasingly popular financial product to provide older adults with liquidity but cannot prevent financial hardship in the long term
References 1. Brancati, Cesira Urzì, and Ben Franklin. 2015. Here today, gone tomorrow: How today s retirement choices could affect financial resilience over the long term, Sustainable Older Society 2020. London: ILC UK. 2. Cushman, Colin. 2011. HECM tax & insurance default policy discussion, Portfolio Analysis, Federal Housing Administration. Washington: U.S. Department of Housing and Urban Development. 3. Hurd, Michael D. 2009. "Subjective probabilities in household surveys." Annual Review of Economics 1:543-562. 4. Lusardi, Annamaria. 2012. "Financial literacy and financial decision-making in older adults." Generations - Journal of the American Society on Aging 36 (2):25-32. 5. Mullainathan, Sendhil, and Eldar Shafir. 2009. "Savings Policy and Decisionmaking in Low-Income Households." In Insufficient funds: Savings, assets, credit, and banking among low-income households, edited by Rebecca M. Blank and Michael S. Barr, 121-145. New York: Russell Sage Foundation. 6. Richins, Marsha L. 2004. "The Material Values Scale: Measurement properties and development of a short form." Journal of Consumer Research 31 (1):209-219.