Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
How could a slowdown in life expectancy growth impact your retirement planning?
It has become accepted wisdom that life expectancy in the UK will continue its unstoppable march upwards. However, two reports published within the last 12 months have caused some to question this assumption.
The first, produced by influential academic Michael Marmot in July 2017, argued that life expectancy improvements have ‘ground to a halt’ since 2010.
The second, a more recent study by the Continuous Mortality Institute, supports these findings and suggests we are moving into a new era of less rapid life expectancy improvements.
BY HOW MUCH HAS LIFE EXPECTANCY INCREASED?
It would be easy to see these statistics and jump to the conclusion that we aren’t all getting older – or that life expectancy is about to head into reverse.
Context is important when considering these relatively short-term trends. According to Marmot, over the last century improvements in healthcare and lifestyle have seen average life expectancy increase by about 12 months every 3.5 years for men. For women, the increase has been about 12 months every five years.
Or to put it another way, male life expectancy has risen nearly seven hours every 24 hours. When you think of it like that, the long-term shift has been truly remarkable.
WHY IS THIS RELEVANT TO PENSIONS?
But what does all this mean for you and your savings plans? Let’s look at the two main bits – what you’ll get from the state, and what you’ll provide for yourself.
• State pension
The new single-tier state pension introduced in 2016 is worth just shy of £160 a week. To qualify for the full state pension you’ll need 35 years of National Insurance (NI) contributions.
Those with less than 35 years of NI contributions but more than 10 years will still get the state pension, but at a reduced rate.
In response to long-term life expectancy increases, the age at which people receive the state pension is on the rise.
The age at which men and women receive their state pension will be equalised at 65 by 2018, before increasing to 66 by 2020. The Government has also set out plans to raise this to 67 by 2028, and then to 68 by 2039.
Whether this happens could depend on the outcome of the next general election. Labour has said it will halt planned increases beyond age 66 and instigate a review of the system, specifically aimed at making the system fairer for those with ‘arduous’ jobs.
However, when it comes to planning for retirement you should assume the proposed increases will go ahead. Indeed, for those in their 20s and 30s, it wouldn’t be surprising to see the state pension age pushed back to 70 and beyond.
• Your own pension prospects
The big conundrum for retirement investors is making sure their pension lasts as long as they do.
For those who choose to buy a guaranteed income stream from an insurer, known as an annuity, rising life expectancy has played a part in declining rates over recent years. Persistently low gilt yields – which are used to set annuity prices – have also been a big factor.
If gilt yields rise and life expectancy projections are revised down, it is possible annuity rates will begin to trend upwards.
If you’re keeping your retirement money invested through drawdown, news that life expectancy improvements are slowing down might tempt you to take more money out of your pension today.
However, the key thing to remember here is that these are just average figures. In reality, none of us know exactly how long we are going to live for, so a sensible retirement income strategy needs to take into account the possibility you will live way beyond the average.
According to the latest ONS projections, the chances of living to 100 will double in the next 50 years – so if you’re healthy, this is the sort of scenario you need to plan for.
As a guide, experts reckon a 65-year-old can withdraw between 3% and 4% of their initial pot value at age 65 and be reasonably confident their money won’t run out.
You could also adopt a ‘natural income’ strategy and live off the dividends your underlying investments produce, thus leaving your capital untouched and allowing it to grow. This only works if your investments deliver enough money for you to live on.
However, the key to making drawdown work for you is to stay engaged. That means keeping track of your investments, knowing how much you’re taking out and reviewing regularly (at least once a year).
Tom Selby, senior analyst, AJ Bell