Research has found that 80% of over 50s significantly underestimate their longevity. The study conducted by Retirement Advantage found that men approaching retirement underestimate life expectancy by an average of six years, and women by an average of eight.
Analysis of official statistics shows that the average 50 to 64-year-old man will likely live until 88, while the average 50 to 64-year-old woman is expected to live until 90. Life expectancy has been steadily increasing in the UK for decades, although data from the Office of National Statistics has found the rate to be slowing.
The impact of underestimating your lifespan can be significant when retirement planning. Andrew Tully, Pensions Technical Director at Retirement Advantage explained; “Planning for retirement can be a complicated business and no one knows how long they will actually live. The Pension Freedoms have given people the opportunity to plunder pension pots early, often before planned retirement ages.”
Mass pension spending?
In 2015 Pension Freedoms represented a major shakeup of pension legislation and the way you can take pension income. Anyone over age 55 can now withdraw their entire pension as a lump sum; 25% tax-free and marginal income tax paid on the remainder. In total, HMRC reports a staggering £17.5 billion has been withdrawn from pension schemes since, and the popularity for making withdrawals reached an all-time high in the second quarter or 2018. There is certainly no sign of the mass spending slowing.
One problem is that not many people are buying annuities which traditionally secured an income for life. Hence, longevity risk (the speculation as to how long you will live and therefore require retirement income), has been passed from the Annuity provider to the retiree.
There are some frightening statistics at the rate some are plundering retirement savings. Pension provider AJ Bell reported that 41% of retirees are making annual withdrawals more than 10% of their total fund value. At that rate, pensions are likely to be exhausted in less than eight years. With a woman’s life expectancy of 90, if they began consistently taking that level of income from age 55 it would potentially leave them with 27 years of later life with no personal pension income.
You could speculate and we would hope, that those spending so quickly have other retirement income earmarked. Other sources will include State Pension, but some might be relying on other investment streams or downsizing property.
A reliance on property equity is becoming more apparent, especially with people lacking financial confidence. Intentionally avoiding investment products in favour of a perceived ‘safe’ property market is a gamble in itself. Property is illiquid, meaning it’s difficult to turn into cash quickly without discounting. In terms of managing investment risk, a diversified portfolio of assets spreads risk. Having all your eggs in one brick and mortar basket exposes retirement income to a single market’s fluctuations.
Arguably health, access to good healthcare and lifestyle carry the largest impact on life expectancy. It may also be determined by education, diet, social life and postcode. Poor health is, of course, a big limiting factor. A National Institute of Health study found that obesity may shorten life expectancy up to 14 years. There are many considerations, but any relating to your health is likely to dictate how retirement income is spent in later life: Long-term care.
A study conducted by Age UK has found that currently, 1.4 million people in the UK have unmet care need. The heavily underfunded NHS is already under pressure, but the same research found that delayed discharges, as a result of no available social care, costs the NHS £500 a minute. It’s clear that the current situation is unsuitable and unsustainable.
What you should do
Whether you’re planning to travel the world in retirement, spend more time with the family or volunteering for a cause you’re passionate about, you’ll need a realistic, sustainable retirement income to support it. A final quote from Andrew Tully; “This is an area where proper financial advice is key. An adviser can make a plan for your personal retirement journey which considers all the risks at play, whether that be investment risk or the risk of living longer than you may have expected.”
Care costs have to be taken into account; the Money Advice Service state the average cost of a care home place in the UK is about £30,000 a year, rising to £40,000 in the South East. Planning now is imperative to remain in control of your future quality of life.
Since the Pension Freedoms shake-up, we’ve witnessed pension spending seemingly way beyond a maintainable level. If you are in your 50s or 60s, retiring successfully requires careful planning and an educated understanding of your longevity. We have more than 20 years’ experience in collaboratively working with people who are planning their retirement to secure a stable and fulfilling lifestyle beyond work. Get in touch to find out how we can help you.