Many people experience cognitive decline at older ages, which can
make it considerably harder for them to manage their finances. As
defined by reaching a very low score on a memory test, 10% of
75-year-olds in England have low cognitive function, rising to
18% at age 80 and jumping up to over 40% in people's late 80s.
Older people who experience cognitive decline see gradual
falls in their financial wealth. Eight to ten years after first
recording low cognitive function in a biennial survey, financial
wealth is roughly £30,000 lower compared with people
with similar characteristics (such as age, education, and health
and cognitive status in late working age) who did not experience
the same decline in their cognitive function.
The exact mechanisms behind this decline are not yet clear. The
reductions in wealth could potentially be a sensible response to
worsening cognition where people decide to spend down their
wealth more quickly. However, related research from other
countries finds that the likelihood of financial mistakes
increases with age. Because of these risks, there is a potential
role for policymakers, pension providers and families to do more
to support older people with their financial decisions.
These are some of the key findings of new research from IFS,
published today and funded by the IFS Retirement Saving
Consortium. Other findings from the research include:
-
Wealthier households who experience cognitive decline
see larger reductions in wealth both in absolute (£) and
percentage terms than poorer households. In other
words, the decline in financial wealth is concentrated among
those in the top half of the wealth distribution. One potential
factor in driving these differences may be greater exposure to
risky assets.
- These declines in wealth are not explained by formal
(non-residential) care costs or financial transfers (e.g. to
children or grandchildren). We see a similar pattern of
declining wealth even among those who never receive formal care,
and transfers outside the household also tend to fall after
cognitive decline.
- In the next few years, new regulations will require UK
pension funds to provide a default retirement income product to
their members. Default products that involve an annuity (income
for life) being purchased with some of an individual's pension
wealth, potentially around age 75 or 80, could help make
financial decisions in older age easier and protect those with
cognitive decline from adverse financial outcomes. There is more
work to be done by policymakers, pension providers and
individuals themselves to ensure people make good financial plans
taking into account the risk of cognitive decline at older ages.
Heidi Karjalainen, a Senior Research Economist at IFS and
author of the report, said:
‘Making financial decisions in retirement is increasingly
complicated, with more people relying on pension pots that do not
automatically provide an income for life. Faced with cognitive
decline and complex finances, many are likely to find it
difficult to manage their finances. The good news is that,
although people facing cognitive decline generally see declines
in their financial wealth, these effects tend to emerge slowly.
This should give individuals, families, pension providers and
policymakers a window to put plans in place to protect the
finances of older people.'
ENDS
Notes to Editor
Cognitive decline and financial wealth at older ages is
an IFS report by Heidi Karjalainen.
- The dataset used is the English Longitudinal Study of Ageing
(ELSA), a nationally representative survey of the population aged
50 and over in England. ELSA runs every two years, and we use 10
‘waves' of data from 2002–03 to 2021–23. For more information,
see the report and https://www.elsa-project.ac.uk/.
- We define a ‘very low score on a memory test' as having a
score of less than 7 (on a scale of 0 to 20) from a word recall
memory test. This means being in the bottom 3% in terms of word
recall scores for those in our sample aged 50–59 in 2002–03.
- US studies showing that the likelihood of financial mistakes
increases with age include:
- Agarwal, S., Driscoll, J. C., Gabaix, X. and Laibson, D.,
2009. The age of reason: financial decisions over the life
cycle and implications for regulation. Brookings Papers
on Economic Activity, Fall, 51–117.
- Korniotis, G. M. and Kumar, A., 2011. Do older investors
make better investment decisions? The Review of Economics
and Statistics, 93(1), 244–65, https://doi.org/10.1162/REST_a_00053.
The author gratefully acknowledges funding for this work from the
IFS Retirement Saving Consortium 2023–25 and the Economic and
Social Research Council (ESRC) Joint Programming Initiative: More
Years Better Lives.
The IFS Retirement Saving Consortium was put
together to fund specific research projects into saving and
pensions. The consortium is made up of organisations with an
interest in pensions policy. These are:
- Aegon
- Age UK
- Association of British Insurers
- Association of Consulting Actuaries
- Aviva
- Department for Work and Pensions
- Franklin Templeton
- Institute and Faculty of Actuaries
- The Investment Association
-
Foundation
- Lane, Clark and Peacock
- Money and Pensions Service
- Nucleus
- Pensions UK
- People's Partnership
- Royal London
- Standard Life
