Although Brits frequently say that if they retire at 65, they will enjoy a retirement of 17 years, two-thirds of people will live for more than 20 years in retirement, according to new data analysis.
in a move to help people manage this and other retirement challenges, Retirement Intelligence has produced a guide, sponsored by Partnership. It argues the case that rather than a straight choice between drawdown and annuities, people could benefit from a combination of both.
Using statistics from ONS, the specialist insurer has highlighted that while the highest proportion of over-18s believe that they will be retired for 16-20 years but they are far more likely to be retired for over 30 years. Indeed, an estimated 30% of people will live for more than 30 years in retirement. The insurer says 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.
ONS data suggests that at 65 years old, the average man will live for 21.5 years (4.5 years more than estimated) and the average woman for 23.7 years (6.7 years more than estimated). However, Partnership warns that averages can be a dangerous premise on which to plan retirement income as they are only when 50% of a particular age group has died – meaning that five out of 10 people will live longer.
While 82% of over-40s felt that they would retire, 18% said that they would never be in a position to do so (up from 9% in 2014).
To help people manage the risk of outliving their retirement income, Partnership has teamed up with Retirement Intelligence to produce a guide to ‘Converting Your Pension Pot into Income – How to Combine Guaranteed Income and Income Flexibility’.
The guide looks at the impact of the new pension freedoms, the issues that people need to consider when they look at income levels and sources. It highlights that a combination of annuity and drawdown can help advisers and their clients obtain he right balance between certainty and flexibility while reducing the overall risk to retirement income.
Billy Burrows of Retirement Intelligence said: “While people may feel that they are being sensible by using ONS data to estimate the length of their retirement, using averages can go horribly wrong – especially if people have chosen to rely entirely on drawdown for their income.
“Therefore, I have chosen to work with Partnership to help people understand the various challenges they face when looking to plan their retirement under the new Pension Freedoms.
“There is a strong case for both annuities and drawdown in the right circumstances but for most people choosing a combination of the two will provide them with the security and access to cash that they aspire to. Indeed, choosing to add a guaranteed income for life to their portfolio means that they are safeguarding themselves against living longer than anticipated which while often desirable can mean that people face significant financial hardship in late old age.”
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 10 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.”