Does financial incapacity matter?

financial capability


We are a nation of financial incompetents.- or so FCA research tells us. A quarter of the people who have accessed a defined contribution pension in the past two years do not know how they did so.

 The Financial Lives survey, which was based on research involving 13,000 people, assessed the attitudes people have towards the financial services sector. FCA

It found people being paid money from their pension pot without a clue how. One in 10 of those aged between 55 and 64 were under the impression income drawdown would provide them with a guaranteed income for life – and just 42 per cent knew drawdown – in which the retirement fund remains invested to provide an income –  would mean a risk of the value of their fund going down.

Only 6% take financial advice (in a regulated sense).

Clearly this matters to the FCA who conclude that half the UK population is financially vulnerable. The FCA does not tell us who we are vulnerable to, I suspect their answer is “to our own stupidity, laziness and moral turpitude” (my words obviously).

But I do not know a gasket from a cylinder head (although many think I should). I do not know how to write a macro and I am totally out of my depth when it comes to carpentry, We can’t all be as good at maths as actuaries or as financially sophisticated as financial advisers.

Infact most people I speak to are very proud not to understand their pension. Ignorance may be no excuse in the eye of the law but it hasn’t stopped many people grabbing cash from the pension system whenever it comes available.

There is a fine line between wilful stupidity and understandable confusion and I don’t know if we’ve worked out where it is drawn.

The obvious question we should be asking is “can we do anything to improve financial capability?”. Mass education may have some impact but we’ll have to wait a couple of generations to see, short term financial well-being programs will provide short term spikes in financial awareness (among those who participate) but most research suggests that improvements are only spikes.

If we cannot promise ourselves that brave new world where everyone knows what they are doing, then we need to ask serious questions about financial freedoms. We do not allow people to walk along railway lines but we do allow people to destroy their financial futures through “liberation”.

There is a middle way between unconstrained freedom and pure paternalism. In the trade it is called “risk-sharing”. It is the way which brings people expertise with minimal personal involvement, results at the least risk and it’s a way that we are resolutely avoiding.

If the FCA learn anything from the 13,000 people they have surveyed is that people want to be good with money but are no good at it. We have the capacity to work together – Government – pensions people and ordinary members of the public and to spend the money we are increasingly good at saving – with good sense.

Employers are brilliant at helping us save (auto-enrolment) but we cannot expect them to help us spend (decumulation).  We need to help each other – through risk pooling and that means returning to some very old ideas about mutuality.

Otherwise the FCA will be repeating the Financial Lives survey in 2027 and 2037 – and finding exactly the same thing.

We need not worry that people are financially incapable, as long as they have default saving and spending options that they and we can trust.


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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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