28th October 2016 at 11:00am
When it comes to your finances, your decisions make a big difference. But if good decisions can give you the comfortable life you want, why don’t we all make them all the time?
It comes down to how people make decisions, says Daniel Kahneman, a leading expert on the psychology of judgment and decision-making.
His insight into how people make decisions is both fascinating and helpful: it largely comes down to thinking fast or slow.
Quick thinking has its place
Fast decisions are the straightforward ones. What will you have for lunch; should you take the lift or stairs? They’re not usually important and the trade-offs aren’t huge.
Slowly does it when it matters
Decisions where you need to think slowly – such as buying a house – are likely to have multiple factors at play and more at stake.
You don’t make decisions like this often, so you’re less used to them. As Kahneman’s research showed, most people struggle to think slowly because our brains are not wired for it.
Since pension rules changed last year, from age 55 you have more choice.
What about your finances?
Many financial decisions fall into the ‘slow’ category, particularly when it comes to something as important as the money you’ve saved for your retirement.
Since pension rules changed last year, from age 55 you have more choice, which is great. But this means you need to make more complex decisions – and it can be hard to know what’s right for you.
There are now so many possibilities…
You can take all your money at once if you want to, or take your money in chunks. Take an income and choose between a flexible one that could eventually run out and a fixed one which is guaranteed for life – an annuity.
Last, but not least, you can just leave your money where it is: You don’t have to take it at 55, or at all if you don’t want to.
With so many possibilities and financial implications if you don’t get it right, how you take your pension could almost define the concept of slow thinking.
So it doesn’t come as too much of a surprise that recent research from State Street and The People’s Pension shows people have been making some common mistakes which could well cost them money.
Here’s my take on it all:
We all want to make better decisions, but how?
It almost goes without saying, but think slow, and take your time.
If you’re not sure how to decide what’s right for you, take a cool, hard look at your options. If you have larger or more complex pensions, taking professional financial advice is likely to be money well spent.
It’s well worth reading about my colleague Alastair Ward’s experience of consolidating some of his pensions.
Make your retirement action plan in three simple steps with our Retirement Calculator.
Alternatively, you can use Pension Wise for impartial guidance, or consider calling your current provider.
Views expressed by Andy Dunbar are his own personal ones and this article should not be regarded as financial advice.
Laws and tax rules may change in the future. Your personal circumstances also have an impact on tax treatment. As with any investment, the value of a pension can go up or down and may be worth less than what was paid in. Information correct as of October 2016.