Have we underestimated the complexities surrounding finance? What if having more autonomy in pension decision-making could lead to undesirable outcomes?

The phrase “pension decumulation” can make many lose interest, especially when combined with “cognitive decline.” However, these issues are critical — impacting us financially, socially, and philosophically.

Decumulation refers to the phase individuals enter when transitioning from working life into retirement, particularly those with defined contribution (DC) pensions, which are savings accumulated throughout one’s career.

Determining how to manage these funds — from investment choices to expenditure levels — necessitates making tough predictions: How will the investments grow? What are my future expenses likely to be? How long can I expect to live?

This “pension freedom” was introduced by George Osborne in 2015, but as time passes, the reality of managing these financial decisions appears increasingly daunting.

Many individuals accessing their DC pension pots do not receive adequate financial advice, largely due to regulatory environments making such advice costly and pushing financial services firms to avoid offering guidance.

Currently, the stakes seem relatively low since many retirees still have some defined benefit (DB) pension plans, and DC pots remain modest. However, as DB pensions diminish and reliance on DC plans increases, the implications of decumulation will involve more significant amounts of money and higher stakes. By 2035, a vast majority of retirees will depend primarily on DC assets for their pension income.

It is poor policy to expect individuals to behave as perfectly rational economic agents — particularly when many are increasingly unable to effectively process information and make calculations as they age.

Research indicates something we seem to know intuitively: Our cognitive abilities decline over time. Neurologists debate when this decline starts — in the late forties or sixties — but regardless of the specifics, it’s clear that pension policy will require many to make consequential decisions just as their mental faculties may be diminishing.

Highlighting these concerns is not ageist; rather, it seeks to initiate an important dialogue about a topic often overlooked.

This is a broader issue within pension policy as well. Politicians focused on short-term elections may not consider the long-term implications, and the electorate often shies away from contemplating a challenging future that demands tough choices.

Progress, albeit slow, is being made. The forthcoming Pension Schemes Bill aims to promote “default decumulation pathways” — encouraging a safer approach to utilizing retirement savings. While this is a prudent step, it may not adequately address the needs of a population that could see almost two million individuals living with dementia by 2040, nor the needs of widows and widowers who may have relied on their late partners to handle finances.

Some segments of the pensions industry are beginning to address these challenges. For instance, Aviva is collaborating with Age UK to offer mid-retirement assessments, helping those in their seventies plan for the next stage of their financial lives. Additionally, Smart Pension’s Smart Retire tool provides a simplified resource that could greatly benefit many as they age.

Unfortunately, much of this dialogue happens within the technical sphere of pension policy, often disconnected from the general public who will ultimately be affected. Without sufficient public engagement, policymakers and industry professionals risk developing retirement systems that operate without transparent support for individuals. This approach is unlikely to be effective in the long run.

In the future, a more proactive approach may be necessary. A resurgence of annuity purchases, although potentially postponed until later in retirement, seems on the horizon. But what does this mean for “freedom?” Is there true value in a freedom that individuals cannot utilize effectively?

No one likes to confront the possibility of a future where they or their loved ones may struggle to manage independently, yet neglecting the cognitive challenges of decumulation will not eliminate these issues. Initiating candid discussions about human frailty and the constraints of freedom is essential.

James Kirkup is a partner at Apella Advisors.