Thursday, March 20, 2014

Pension Reform in the UK

One of the major announcements in the UK budget speech yesterday was the reform of pension policy. In particular retirees in defined contribution schemes can now draw down their entire pension pot as a lump sum rather than receiving pensions in the form of an annuity. This is nicely summarised in this BBC article (see also page 42 onwards in the budget document). There are many interesting behavioural questions in this area including who saves for retirement in the first place, how people make comparisons between different ways of using their retirement funds and how firms may potentially exploit behavioural biases through complex and opaque pricing structures. A potential behavioural issue that has been discussed widely over the last day is the extent to which the new freedom to draw down a pension fund may lead to people spending it too quickly for a variety of reasons. The fact that drawn-down funds will be subject to tax might reduce this tendency to a degree but there are still many plausible behavioural reasons to think that at least sizeable subsets of people find this type of smoothing difficult. Having said that, there is also a clear normative issue as to the freedom people should have to control their own finances. Added to that it offers the possibility for consumers to withdraw from the annuities market and attempt to find better value elsewhere (something that may lead to adverse selection in the annuities market as noted by the BBC). In any case this is a major policy move and, coupled with the continued roll-out of autoenrolment, sees a very different pensions environment in the UK, one that has many features that should be studied closely by people interested in behavioural economics and policy.


Carl Emerson (IFS) slides on pensions aspects of the budget. He outlines reasons why compulsory annuitisation might be a good thing.

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