Retirees could be at risk of emptying their pension pots a decade early, as ‘the lottery effect’ sparks impulsive financial decisions, says Legal & General.
New research from L&G found that on average, people have £87,500 in their retirement pot before they start accessing it. A third (32%) 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% of their pot, with an average income of £875 per month once they reach state pension age. For those who may not have other sources of income, such as property wealth or a defined benefit pension, the pension pot typically runs out by age 77, falling short of the average life expectancy of 86.
L&G said this shortfall in retirement income could be a result of ‘the lottery effect’, where overnight access to large sums of money can trigger a psychological rush which can spark impulsive or unsustainable spending, similar to winning the lottery.
One in seven (15%) revealed they felt like the cash lump sum from their pension was an unexpected financial bonus, rather than part of their long-term savings plan, while 10% said it felt like a payday and they wanted to spend it.
Over a fifth (22%) 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%) said they accessed the cash simply because they could.
Katharine Photiou, managing director workplace savings at L&G, said: “For most people, their pension pot is the largest sum of money they’ll have access to, and after decades of hard work and saving, it’s natural to view it as a well-deserved reward. However, our research shows the sudden financial freedom can trigger ‘The Lottery Effect’ for some savers, which can lead to unsustainable spending. On top of this, with unused pension savings also subject to IHT from 2027, it could add to people withdrawing from their pots in an unsustainable way.
“But what seems like financial freedom now might turn into uncertainty later. Everyone’s situation is different, and some people may turn to other potential sources of income, such as their property, to make up the shortfall.”
L&G’s research found that 14% of people who have accessed cash from their pension have regrets about doing so or spent more than they planned. Among this group, 29% had unexpected costs to cover, while a quarter (26%) felt they could afford it at the time. A further 15% said that since taking a lump sum, they have become more concerned about outliving their remaining pension savings.
Furthermore, the majority (58%) 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%) admitted they didn’t fully understand the impact of their decisions.
Dr Emma Hepburn clinical psychologist added: “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.”
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