Cognitive decline is costing older people around £30,000 in financial wealth over an eight to 10 year period, according to new research from the Institute for Fiscal Studies (IFS).
The findings highlight how deteriorating memory and decision-making abilities can leave retirees increasingly vulnerable when managing their money.
The study shows that more than four in ten people in their late eighties experience low cognition, defined as scoring below seven out of twenty on word recall memory tests.
Rates of reduced cognitive function rise sharply from the mid-seventies onward.
Between two and five per cent of people in their fifties and sixties record low cognition scores.
This climbs to fourteen per cent among those in their late seventies.
Memory scores drawn from the English Longitudinal Study of Ageing fall by roughly one third between the early sixties and late eighties.
The steepest declines take place after age seventy-seven.
The shift towards defined contribution pensions has added new pressures for those approaching retirement.
Unlike traditional pension schemes, these pots are rarely converted into annuities that guarantee income for life.
The one thing costing pensioners £30,000
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This means more older people must continue making active financial decisions well into their later years.
Many will do so as their cognitive abilities decline, increasing the risk of costly mistakes.
Average memory performance stays relatively stable through the fifties and into the mid-sixties.
However, scores typically begin to fall from the late sixties, with particularly sharp drops among people in their eighties.
The combination of increasingly complex financial products and advancing age creates significant challenges for long-term financial security.
The report warns that this environment places additional strain on those least equipped to navigate difficult choices.
Educational background plays a clear role in rates of cognitive decline.
Among people in their fifties with degrees, fewer than two per cent show low cognition, compared with seven per cent of those without qualifications.
This difference persists into very old age.
By the late eighties, one third of degree holders record low cognition scores, compared with half of older adults without formal qualifications.
The financial impact is most severe for wealthier households.
Those in the upper half of the wealth distribution lose the largest sums when cognitive decline sets in, both in total value and as a share of assets.
Greater exposure to complex or higher-risk investments may partly explain these sharper falls.
The IFS stressed that the declines cannot be explained by care costs or financial gifts.
Even people who never receive formal care services display the same pattern of falling wealth.
This suggests that the central factor is declining decision-making capacity rather than health or family support.
Pension industry representatives have called for major reforms in response to the findings.
Kirsty Ross, Head of Proposition at People’s Partnership, which provides the People’s Pension, said: “This report provides even further clarity of the impact of cognitive decline on retirement decision-making, and correlates with our extensive research, ‘New Choices, Big Decisions’.”
She said complexity within retirement products increases the risks for older adults.
“This latest research reinforces the case for simpler, guided retirement pathways that help people make sustainable decisions without having to become pension experts”, Ms Ross added.
She said upcoming decumulation reforms give providers and policymakers an opportunity to create systems that deliver clarity and protection for people as they age.
These measures include new requirements for UK pension schemes to offer default retirement income products.
The IFS said default options that use part of a pension pot to buy an annuity at age seventy-five or eighty could help safeguard older savers.
Steps can be taken to stave off the financial impacts of cognitive decline
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This would remove the need for individuals experiencing cognitive decline to manage complex decisions alone.
Establishing power of attorney is another step individuals can take before decline becomes pronounced.
The gradual nature of cognitive deterioration offers a window for action by policymakers, pension providers and savers themselves.
International research indicates that financial errors become more common with increasing age.
The report argues that timely intervention could protect older people from avoidable financial losses.