How long will my pension need to last is a question we get asked on almost a daily basis.
One of the major recent changes driving this question for everyone has been the so called ‘pension freedoms’, which came into force 3 years ago.
In the “old days” the main choices were what type of annuity you were going to buy at retirement with your money purchase arrangement and what to do with your tax-free cash.
These days the primary concern should be whether or not you will run out of life before you run out of money and can you enjoy the sort of retirement that you planned or dreamed of.
One of the key driving issues is of course mortality and the medical improvements that have been seen over recent decades. This now means that our client conversations about mortality have also needed to be adapted.
Our experience since pension freedoms is that in almost every single case our clients underestimate how long they may live. We’re not entirely sure if our clients are particularly pessimistic or if this is a general trend. We suspect people simply don’t want to think about it!
At our client meetings, we always ask about family history and what age the parents of our clients died as a starting point. To help our clients better understand the issue we also use the calculator provided by the Office for National Statistics (ONS) https://visual.ons.gov.uk/what-is-my-life-expectancy-and-how-might-it-change/ . This tool really helps to develop these conversations.
To highlight this, if we take a male aged 66, the ONS calculator shows an average life expectancy at age 86, so 20 years away on average. However, what our clients often forget is that the ONS tool also highlights that there is a 1 in 4 chance of reaching 93 and 1 in 10 chance of reaching 97. This can have enormous consequences on financial planning and we find this tool helps us to set more reliable expectations for our cashflow work. Many a time clients have questioned why we have set their possible age at death as 95 or later.
The ONS has also published some interesting statistics about how life expectancy at age 70 has improved. Based on mortality patterns in 2016, men aged 70 can now expect to live for a further 15.3 years, up from 11.0 years in 1990. For women this is 17.3 years, up from 14.3 years in 1990.
This may also help to explain why more people are now still working into their 70’s, which in part has also been put down to legislation which came into force in 2011, which prevented employers from compulsorily retiring workers once they reach 65.
The good news however, is regardless of the reasons for increased employment, people in their 70’s are more financially secure than in the past. In the British Household Panel Survey of 1991 only half of people (52%) reported their financial situation as either ‘doing alright’ or ‘living comfortably’. By 2016 this had increased to 82%.
This suggests that older people are healthier and more able to continue working into later life, after traditional pensionable age. For some, it could be due to a desire to work and stay active, but for others because of a need to work due to insufficient retirement income.
In the words of financial guru Nick Murray “When your money outlasts your life, in retirement you can maintain your dignity and independence”. Without a financial plan, you most likely won’t achieve this, so the need for sound financial planning which includes full cashflow planning, is now needed more than ever. How long will my pension need to last is longer than most people imagine.