It is a “time bomb” in financial planning. Professional services companies warn that new UK retirees are underestimating how long they may live after they have stopped working, and there is a risk of serious misjudging their retirement plans.
Barnett Waddingham issued an alert based on a new analysis of data on people in the defined benefits pension scheme, a group that lives slightly longer than average. This study found that 65-year-old women in such schemes underestimate their average life expectancy (89 years). The man underestimated his appearance at the age of 86.
Jack Carmichael, actuary at Barnett Waddingham, calls it a “wake-up call” because those close to retirement, especially women, are at the most risk.
Other wealth advisors agree.
“It’s not just a pension issue,” Carmichael says. “This is a fundamental financial challenge that requires immediate attention and a time bomb on society’s approach to financial planning for seniors.”
Miscalculations can encourage pension savers to put aside too few provisions for future pensions, says wealth advisors. It also allows for too few investment risks, addressing future care needs, and underestimating the appeal of pension purchases.
Matt Conradi, Netwealth’s Associate Chief Executive Officer and Netwealth’s advisory officer, acknowledges the issue, but says that underestimating life expectancy at retirement is “normal and natural.”
“People think about it a lot when their parents die,” he says.
Experts say underestimation is a particular concern for women, and can be particularly concerning for women who usually have fewer pension pots than men. They recommend that women make the most of their pension savings allowances. Profitable partners can donate a total of up to £3,600 a year to their non-earning spouse’s pension.
Malvee Vaja, financial planner at Rathbones Financial Planning, said women need to make the most of their annual allowance of £20,000 to save on tax-free personal savings accounts (ISAs).
“We have clients who did that and some of the women have an ISA of £1 million,” Vaha says.
Most couples need to plan for a female spouse to live longer and their husbands longer. Men not only have a shorter average life expectancy than women, but are on average three years older than their wives.
According to Oliver Cyman, co-founder of six-time wealth advisor, people tend to underestimate the likelihood of reaching 90 in particular. Barnet Wadingham found that while only 14% of both sexes would reach that age, 28% of men and 40% of women were more likely to do so.
“If one in three women live above 90, there is a problem with planning average life expectancy,” Saiman says.
Wealth advisors usually model cash flows for couples up to age 93 when they advise at the time of retirement. One company even says it models up to 100.
Conradi said: “Unless you’re in a state of health, you shouldn’t model the early ’80s.”
Such cash flow plans end with the death of a young spouse. However, according to Vaja, household spending isn’t necessarily half as long when one partner dies, so they are built within a large safety range.
“When one partner is given, it can be expensive, but if the person is not as good as mobile, it can be low,” says Vaja. “Until we get there, we don’t know which one it is.”
One of the risks for women is that they act as caregivers for their partners and then live longer for them and if they want to take care of their children, then there is no one other than the child.
However, Conradi says it remains common for retirees to overestimate the resources they need to pay for, how long is it likely that they will spend on residential care and that they will still be common.
“Most people don’t take two years to get into a nursing home,” he says.
However, Saiman warns that anyone who needs to be careful not to run out of money after retirement should be careful not to run out of money after retirement. In particular, he has been used to the idea that pensioners should reduce their risk exposure over time – cautioning that increasing risk exposure should be considered to ensure incomes last.
“The risk may need to be greater than previously taken when actually building an pension,” Saiman says.
Even in the 70s and 80s, many modern pensioners can take extra risks as they still have employment income from their roles as consultants and directors of non-executive companies.
“The ability to invest risk is higher than they think,” Saiman says.
If they fail to grasp their true average life expectancy, the advisor says, could encourage couples to underestimate their ability to give gifts without burdening inheritance tax.
According to the advisor, couples avoid giving gifts to their children. Because they fear that they will not survive the gift for seven years. After pensions became tax-related in April 2027, more retirees are considering making such gifts.
Meanwhile, according to some financial planners, skewed ideas about life expectancy can encourage you to miscalculate the likelihood of purchasing annuity to fund your pension.
Such instruments provide guaranteed income purchased in lump sum from retirement benefits, but in reality it is a bet with the provider regarding the longevity of the buyer. If the provider lives longer than expected, the buyer wins. A 65-year-old can now purchase a Level Single Life Pension of £7,830 a year with a pension of £100,000.
William Burrows, financial advisor at Eadon & Co, says potential buyers often think that pensions are against them.
“They think they haven’t lived long enough to win the bet,” Burrows says.
But Carmichael of Barnett Wadinham says that for those who advised to eat five fruits and vegetables every day, it might be better than they initially think.
“Think about your lifestyle being in your 50s and 60s,” Carmichael says. “If you’re a marathon runner and eat five days a day, it might be worth buying.”
