New research by the Institute for Fiscal Studies (IFS) has revealed that a decline in cognitive abilities is costing pensioners around £30,000 in financial losses over a span of eight to 10 years.
Findings show that deteriorating decision-making and memory skills can mean pensioners are increasingly vulnerable when making financial choices and managing their money. It’s been reported that more than four out of 10 retirees in their late eighties experience low cognitive abilities, typically scoring just seven out of 20 on word recall tests.
Pensioners who suffer from low cognitive abilities end up losing around £30,000 within eight to 10 years compared to those who remain cognitively stable. While their finances may look similar when cognitive decline first starts, a large monetary gap can expand over time. The biggest decline in cognitive abilities occurs after the age of 77. An economic movement towards defined contribution pension schemes, a fund of money made up by personal and employer contributions, has created new pressures for those approaching retirement age.
This is different to traditional pension schemes, because funds from defined contribution schemes are rarely converted into annuities which provide a guaranteed income for life. As a result, retirees are left making big monetary decisions well into their later years when cognitive abilities decline the most.
The IFS warned the £30,000 loss cannot be explained by care home costs or financial gifts, which suggests the main cause is declining decision-making capacity. Experts have called for major changes in pension options due to the findings, in an attempt to protect older people from avoidable financial losses.
They’ve said upcoming retirement and pension reforms will give banks and policymakers the chance to overhaul their systems to provide new pathways which will give clarity and protect retirees.
Kirsty Ross, Head of Proposition at People’s Partnership, told GB News: “This latest research reinforces the case for simpler, guided retirement pathways that help people make sustainable decisions without having to become pension experts.”
These measures could include new requirements for UK pension schemes to offer default retirement income products. The IFS believes default options which include the option to buy an annuity between 75-80 years old could ensure pensioners and their savings are safeguarded.
Another measure pensioners should consider is choosing a power of attorney before cognitive decline starts. This is a legal document which allows somebody else to make financial decisions for the older person. Selecting a power of attorney would avoid pensioners suffering from cognitive decline having to make complex and irreversible financial choices alone.
A combination of increasingly complex financial schemes along with ageing and declining cognitive abilities poses significant challenges for pensioners trying to achieve long-term financial security, with policymakers and pensioners themselves urged to use the gradual nature of cognitive decline as a window for action.