About the research
This study examines a range of quantitative evidence to shed light on how those nearing retirement age with defined contribution pension funds are approaching and dealing with certain financial decisions that will affect their retirement income.
Defined contribution pensions require individuals to set aside sufficient funds to buy an annuity income at a level they desire. This requires them to have a reasonable idea of how long they will live and what the price of annuities is (and will be). The aim of this project is to examine how well-informed defined contribution pension holders are in these dimensions, and how this relates to behaviour around the point at which individuals annuitise.
In short, this study’s findings suggest that individuals find it harder to estimate how much income they will receive from defined contribution pensions than from defined benefit pensions. This would tend to imply that risk-averse individuals would save more for retirement. However, the findings also suggest that individuals may be overly optimistic, on average, about how much income a given defined contribution fund will generate (perhaps because they are found to be, on average, pessimistic about life expectancies). If future cohorts of retirees are overly optimistic about annuity prices, they could end up saving too little.
Methodology
Two questions from the Wealth and Assets Survey were used in the research; they asked about expected date of retirement and expected length of retirement. Most of the analysis focused on the sub-sample of individuals who were aged 50 to 64.
Using data from the English Longitudinal Study of Ageing enabled the researchers to conduct two types of analysis:
- Cross-sectional (wave 5) – This analysis examined individuals’ average wealth holdings compared with their expectations of future private pension income.
- Longitudinal (waves 1 to 5) – Constructed a dataset of observations of individuals moving from the accumulation to decumulation phase of pension saving (spending retirement savings). They also proceeded in analysing changes in other behaviours at the same point and compared expectations reported before retirement to outcomes measured after retirement.
Publications
This research was featured in the following report:
Tetlow, G. and Crawford, R. (2012) Expectations and experience of retirement in defined contribution pensions: A study of older people in England, (IFS Report No. 73), London: Institute for Fiscal Studies. doi:10.1920/re.ifs.2012.0073 Retrieved 28 August 2013 from http://www.ifs.org.uk/comms/r73.pdf