Oranges and lemons

Graeme Riddoch

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Fruit machines. Somehow, they seem like a relic of the past, consigned to damp and dark amusement arcades, or hiding in the corner of the pub waiting to swallow pound coins on the way back from the toilet.

Other than the big red play button, the only other feature I remember is the nudge buttons, which, with some random pressing, might line up the oranges and lemons to make you a winner. So, for me, nudges have always been associated with a bit of a gamble.

Changing behaviours

In the pensions world, there’s a lot of talk about nudging people in the right direction. That’s behavioural code for getting people to save a bit more.

Historically, the industry’s solution to nudging has used calculators to show accumulated funds and the impact of an increased contribution. So, for example, show the member that by saving an extra £30 a month they might get an extra £5,000 a year at age 65.

However, the idea that we can simply nudge people towards saving more for an uncertain future isn’t a winning strategy. It’s a start, but only part of the solution. If you don’t know what income you need for your retirement, you won’t be very motivated to save more.

Back to front

How about coming at the problem from the other end? Figure out what you want out of retirement, then work back. That can be tricky for people to visualise.

I recently read some interesting research where people were shown an image of their future selves. There are quite a few apps that will age your image. It seems that people have a greater propensity to think about their future when they see an older version of themselves. I’m 58 and I rolled forward 20 years; not pretty!

Staying on the theme of visualising the future, the PLSA recently developed their Retirement Living Standards. These are designed to give people a picture of what their expenditure could be in retirement based on a basket of goods and services. At the minimum level it’s £15,700 a year and at the comfortable level £33,000 a year for a couple. That’s outside London.

Expenditure is broken down into six broad categories. For example, in the comfortable bracket you change your car every five years and have three weeks’ holiday overseas each year. Breaking these figures down into the goods and services, frequency of holidays etc. allows people to visualise what they want out of retirement and what it might cost. Now we are getting somewhere.

Nudge up

This is all good and well, but how do we translate what we have now into what we might need in terms of a retirement lifestyle? I’ve seen a few solutions that attempt to do this, with varying degrees of success. A new product called Guiide gets close to bridging the gap. No, that isn’t a typo.

It’s a free to use tool that quickly allows you to input your savings and see how they could marry up to the income required for three different income levels, equating to a basic, moderate or comfortable retirement. It takes about five minutes to get to an answer and also pulls in the correct State pension figure.

I tried it myself and it’s easy to use. It tackles life expectancy by asking you to self-score from major health conditions to perfect health. It’s a bit subjective but there is only so much detail you can get to in what’s designed to be an easy to use tool.

It seems to me that simple solutions like this can add power to the nudge. If we can apply this to pensions and, for example, pre-populate defined benefit and defined contribution fund values, this would make them more accurate and easier for the member to use. Add into the mix the long-awaited Pensions Dashboard and we can surely help members see the bigger picture and plan for their future lifestyle accordingly.

And perhaps we can start lining up those oranges and lemons!

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