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People live longer than they expect, spelling trouble for later life finances

Cherry Reynard
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Cherry Reynard

Savers significantly underestimate their life expectancy with implications for their financial planning in retirement, according to a report from the Institute for Fiscal Studies.

The report showed that those in their 50s underestimate their chances of survival to age 75 by around 20 percentage points and to 85 by around 10 percentage points. It is only as people get older – into their late 70s and 80s – that they start to become ‘mildly optimistic’ about surviving to ages 90, 95 and above.

This affects the way people plan for retirement. Around 65% of individuals believe annuities – priced according to average survival chances – offer an unfairly low income. If they were more realistic about their life expectancy, annuities would look better value.

The report found actual survival probabilities differ significantly according to individuals’ education, wealth and marital status. Women of 60 in the bottom fifth of household wealth had a 65% chance of surviving to age 80, compared with 87% for those in the top fifth, based on mortality data.

Smokers and cancer patients both tend to adjust their life expectancy. Current smokers report on average six to eight percentage points lower probability of surviving to an age 11–15 years ahead than do non-smokers. A new cancer diagnosis was associated with a five percentage point reduction in the stated probability of surviving to an age 11–15 years ahead.

‘Perfect storm for future retirees’

Tom Selby, senior analyst at AJ Bell, said: “While the rapid rise in average life expectancy experienced in the UK over recent decades is to be celebrated, it also poses a serious retirement planning conundrum. If large numbers of people massively underestimate life expectancy and spend too much in retirement as a result, they risk running out of money early and potentially falling back on the state.

“There is no clear evidence that savers are squandering their hard-earned pension pots in the wake of the pension freedoms. However, our own research shows a significant minority are making annual withdrawals of 10% or more, with the average person expecting post-charges investment returns of 5%. The combination of underestimating life expectancy, overestimating investment returns and overspending could create a perfect storm for future retirees.”