Spence & Partners, the UK pension actuaries and administration specialists, today shared its concerns that with figures from the ONS* showing newborn female babies are expected to live to 93, and male babies to at least 90, if pension savers don’t fully understand longevity risk (that they will outlive the funds in their pension pot) when planning their savings, they may be facing a long and financially difficult retirement.
David Bogle, Mortality Expert, Spence & Partners said: “People need to start understanding how their retirement prospects will be impacted by uncertainty around their own life expectancy. Research published last week by the Office of National Statistics (ONS) projected that in 50 years’ time newborns in the UK will be expected to live past 97 – life expectancy has vastly increased since previous generations, and this underlines the importance of fully understanding our own longevity risk and ensuring we are putting enough money aside. Unfortunately we just don’t expect to live as long as we will, and it is crucial that this is factored in to everyone’s retirement planning.”
A recent paper** from the Australian Actuaries Institute, the UK’s Institute and Faculty of Actuaries; and the American Academy of Actuaries outlined the key areas that people need to consider to ensure that their pension pot and the way they use it marries up with their life expectancy.
Off the back of this study, Spence has put together an easy guide for people to reference when thinking about funding their pension to ensure it supports their whole retirement:
Spence’s Guide to keeping your longevity risk SAIFE
Sustainability: Any system adopted must be sustainable enough to last you, your whole life. If you are saving via a workplace pension, the due diligence will have been done for you on your behalf by your employer. If you are saving via a pension you have selected yourself, consider seeking advice to ensure that you have or are making the right choice.
Adequacy: The benefits in retirement must be adequate to maintain your standard of life. This will mean different things to different people, and what will be adequate for you, may not be adequate for someone else. Think about your plans for retirement and the lifestyle you’ll live. Will you travel more? Settle in the country where houses and rent is cheaper? Will you live roughly as you are now, or are you planning to wind down? How much will you need to maintain your chosen lifestyle? – You may be surprised at the answer.
Information: Make the most of all information available to you to help make more informed decisions. There are many options to get you started before you even get to the point of having to pay for advice for example: https://www.pensionwise.gov.uk; www.thepensionsregulator.gov.uk or http://www.plsa.co.uk/. If you have a workplace pension, also ask your employer or your pension provider. There are also a number of free phone apps out there that can estimate your life expectancy to help in your planning, however please use with caution as these can provide wildly differing results. In any case, these can only provide you with an “average” life expectancy – in reality you might live for another decade or more.
Flexibility: How much you need in retirement income will depend on your individual circumstances and the lifestyle you aspire to lead once you finish work. Ensure that your benefits reflect this and be flexible if your circumstances change. For example, do you intend to work for a short time after retirement by taking on small jobs? If so, you perhaps won’t need as much income from your retirement fund in the early years after retirement, and your retirement planning should be reflected accordingly.
Equitable: The government must ensure that the framework that is being used for your retirement provision is equitable and fair (especially with regards to tax relief). This can be quite difficult to define, and it will be up to you to determine how you will be affected by what a government determines to be fair or equitable. What may be fair and beneficial for the population as a whole may not be the same for an individual.
David Bogle, Mortality Expert, Spence & Partners said: “While longevity risk is understood by pensions experts, it has not really been understood by most people outside of the industry. This is improving with the introduction of auto-enrolment, “pensions freedoms”, and the DWP’s heavy promotion of the “Workie” mascot, as an attempt to get the general public thinking more about retirement. While retirement planning is in the public eye, probably more than ever before – which is certainly a positive thing. But as always, more can be done.
“In this new era of additional choice in retirement, people need all the help they can get. Especially since the ABI recently reported that over 55’s have cashed-in over £5bn of their pension pots since the pension freedoms were introduced. That is a lot of money, and possibly represents a significant reduction in future pension payments. It is clear that a significant degree of financial management needs to be promoted to ensure those over 55’s are making the most informed decisions possible.”