Since the introduction of new pension freedoms last April, we have increasingly been asking our clients, could you outlive your pension pot?
Life expectancy is a tricky subject.
We all know our date of birth, but knowing for sure our date of death is another matter.
It is possible to base a pension pot withdrawal strategy on life expectancy; either published figures or your own expectations for a length of time spent in retirement.
People retiring at 65 years old typically expect to enjoy a retirement of 17 years. However, two-thirds of people retiring at age 65 will live for more than 20 years.
The thing about averages is, you are not average!
New data analysis from specialist insurer Partnership has been published with the aim of helping people manage this and other retirement challenges.
They also argue that a solution the question of whether you will outlive your pension pot could be a combination of annuity purchase and income drawdown.
Partnership looked at data from the ONS, and discovered the highest proportion of adults believe that they will be retired for 16-20 years.
However, the data shows they are far more likely to be retired for over 30 years.
[tweet_box]How long do you expect to spend in retirement? You’re not average! [/tweet_box]This discrepancy is likely to cause significant issues to those who are basing their retirement income needs on perceived averages – especially if they have chosen pure drawdown rather than a combination of drawdown and annuitisation for their pension pots.
The ONS data suggests that, at 65 years old, the average man will live for 21.5 years. This is 4.5 years longer than estimated.
The average woman is expected to live for 23.7 years in retirement, which is 6.7 years more than estimated.
As mentioned earlier in this post, averages can be a dangerous premise on which to plan retirement income.
Averages only occur when half of a particular age group has died. This means that that 5 out of 10 people will live longer than the average.
One way to deal with this longevity challenge in retirement is to secure sufficient income using an annuity to cover essential expenditure, using income drawdown for the balance of your pension pot.
This approach delivers the right balance between certainty and flexibility in retirement.
Richard Willets, Director of Longevity at Partnership, said:
“While the largest proportion of people assume that they will live for 16 – 20 years in retirement, the ONS data actually suggests they are more likely to live more than 30 years.
“Most people will work a margin of error into their retirement income planning but ten or more years is a significant period of time to make up from a finite pot of assets.
“Even those who have studied this subject extensively would struggle to definitively answer the question – how long will a specific individual live – so it is vital that people ensure they have some mechanism to guard against the consequences of underestimating their own vitality.”
Could you outlive your pension pot? How does your retirement plan reflect this longevity challenge?
