A recent study published by Imperial College London shows that the most recent predictions for life expectancy from the Office for National Statistics was too low.
Pensioners will need to ensure their retirement income will last longer than previously thought, which puts even more importance on making the correct decisions regarding pension freedoms and how best to handle finances in later life.
The Imperial College used death records from 1981 to 2012, basing their information on postcode, age and sex to come up with predictions for life expectancy for 375 different area in England and Wales, as well as national averages for both men and women.
The researchers also estimate that the gap between men and women’s longevity will reduce. Currently the ONS thinks that by 2030 men will live for an average of 79.5 years and women to 83.3 years. However, Imperial College predicts much lengthier life spans of 85.7 years for men and 87.6 for women.
This could have a dramatic effect on the way we need to think about pensions, both in terms of saving – earlier and much more than previously predicted, and how those with defined contribution pensions will choose to access and invest their pension pots.
Annuity products offer a guaranteed income for life and can protect the partner if the policy holder dies first. They offer even better value for money if the holder has a medical complaint or has unhealthy habits such as smoking or heavy drinking.
A pension saver could use all or part of their pension pot to invest in an annuity, or they could choose to invest their money in other ways.
Invest and drawdown schemes are proving very popular in the wake of the pension reforms, whereby savers can take a yearly income from their pension pot whilst leaving the rest invested in the fund.
Many are choosing to take cash from their pension pots to invest in other ways such as buy-to-let properties or starting a new business. However, taking large sums of cash from a pension pot could mean a hefty tax-bill.
Whatever savers choose to do, they need to realise that their money will probably need to stretch much further than they had anticipated, and they need to factor in the extra years before making any financial decisions about their retirement income to ensure they don’t run out of money and have to rely solely on the state pension in later life.
The average life expectancy can differ greatly depending on where you live in England or Wales, for instance in London alone there is a difference of between five to six years for those who live in Chelsea compared to those living in Tower Hamlets. Northern urban areas have shorter life expectancies by around six to seven years compared to rural southern areas.
One of the biggest surprises from the study was the marked reduction in difference between men and women’s life expectancy. This is largely due to a decrease in younger men dying in wars, violent assaults or in car accidents. Also, men are now more likely to lead a healthier lifestyle with more exercising regularly and less smoking and heavy drinking than in previous years.