Pensions: savers should factor cognition into investing choices

Age is no barrier to savvy financial decision-making. Warren Buffett, the world’s most famous investor, is 92. Even so, private investors need to ask themselves a dispassionate question which also applies to US presidential candidates : will there come a time when I am too old for this lark?

Mortality expectations are a key input in pension decision-making, even though UK savers habitually underestimate funds required. Declining competence hardly figures, even at an implicit level.

A third of people in their seventies have some sort of cognitive impairment. These will make it harder to judge risks of investments — either of steep losses or miserly returns.

Three factors mean more UK retirees face more investment decisions. The first is the decline of private sector defined contribution pension schemes. The second is the freedom to take fund transfers from these schemes to defined contribution vehicles. The third is the scrapping of a requirement to buy an annuity with the latter by the age of 75.

Financially literate sixtysomethings should have no problem investing judiciously via a self-invested personal pension or other vehicle. It may become more of a struggle a decade or two further on.

Fund depletion, investment switches and inflation assumptions are all in the mix. So are ambitions to pass on wealth to progeny.

Analysing these issues is hard. Many people do not even try. The over-55s spend more time buying a car than managing their pension money, according to L&G.

Older investors often have the benefit of experience. Yet University of Miami academics found this was offset by a deterioration in stock selection and diversification skills at around the age of 70. Moreover, confidence does not decline in line with ability, according to a separate Miami study.

Even so, expect strong demand for advice from retiring baby boomers. That is good for the likes of service-driven UK savings group St James’s Place, says Jefferies. Less so for direct-to-consumer platforms such as Hargreaves Lansdown.

Not everyone wants to pay high fees. DIY investors can lower risks in other ways. Some will set up steady-as-you-go portfolios. Others will seek guaranteed income. Annuity rates are 40 per cent higher than in 2016.

But the overriding rule for ageing investors is the same one informing successful careers when younger: know your strengths and weaknesses.