By Rona Train, Partner, Hymans Robertson
On the positive side, I’ve never smoked (which both my mum and my grandfather did) and whilst I’m not averse to having the “odd” glass of gin or wine and am sitting in the “overweight” category in relation to my BMI, I do exercise, drink plenty of water and enjoy eating fruit and vegetables.
Notwithstanding this, the age at which I might die remains critical to me in planning my financial future. There’s been a lot of coverage of Investment Pathways which are now mandatory for contract-based providers and which are also being adopted by a range of master trusts. Setting a sustainable rate of income in retirement is key to ensuring that people don’t run out of money before they run out of breath. Much of the analysis we do around outcomes is in relation to the investment portfolios that are most appropriate for different types of members. But using a standard set of longevity tables is likely to mean that some will over-provision and others will run out of money.
Using the power of data on more than 3 million UK pensioners, and 1 in 4 of all DB pensioners, our friends over at Club Vita, a data utility that provides longevity analytics to pension schemes, advisors and insurers throughout the retirement industry, are now supporting pension schemes and providers to help individuals moving into drawdown have a more personalised estimate of their life expectancy. This ultimately helps them plan more accurately for their retirement in terms of the number of years their money might need to last. It’s not going to be 100% accurate, and there will be individual cases where life expectancy doesn’t turn out as expected, but anything that can give a more informed picture for members is a good thing
I’ve been working in the field of investment for over 30 years – but I must admit to finding the topic of longevity fascinating. Did you know that the difference in life expectancy between a man retiring at 65 in good health, living in an “affluent” postcode and doing a well-paid job in the service sector and a 65 year old man retiring in poorer health, with a lower income and a living in a less “affluent” postcode could be anything up to 10 years? That makes a heck of a difference to how long your money needs to last after you’ve retired! And early evidence shows that the impact of Covid will be growing disparities in life expectancy between the more and less affluent, exacerbating the differences and making standard mortality tables even less effective in planning a sustainable rate of retirement income.
This is not just relevant after retirement – it also impacts the amount a person needs to save during their working career. “Mr Affluent” above needs to contribute an extra 5% per annum over his working lifetime, or an extra 25% per annum from 45, to make up for the additional life expectancy. So early planning is vital to achieve optimum results and may require targeted communications.
There’s been a lot of talk about the retirement “smile” – spending lots when you first retire, then sitting in the house in your 80s being able to do less, and then having the cost of later life care. But people are not homogeneous. For many, they will simply not live long enough to see the uptick in the smile or will rely on social care to largely cover their later life spending. Others will need to fund their retirement well into their 100s.
Men generally underestimate their life expectancy by 5 years and women by 8 years. That could create a big hole in their retirement plans. ONS statistics show that the average 45-year-old female now has a 1 in 10 probability of hitting 99, with this being even higher for those at the top end of the affluence spectrum. There are plenty of risks much further up the agenda with members, but most of these will have a much lower probability.
For many, an individual’s pension should not be their first source of income in retirement. Some people will have ISAs or other investments which could fund at least the start of their retirement, leaving their pension savings invested in a tax efficient wrapper for longer. These are all key considerations and point to the need for better quality guidance and advice to members who are retiring.
Hopefully I’ll make it through the next year – well the Rugby World Cup is not until 2023 and I already have my tickets so maybe I’ll just up my exercise and cut down on my wine consumption (or alternatively not make resolutions I can’t keep!).
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