How long do we have? Piecing together employees’ retirement

A man and a woman trekking

Pieces of our life puzzle may not all be in place yet, but businesses can help employees plan for retirement by exploring life expectancy and flexible pension options.

So, you’ve saved all your life for what you hope will be a long and happy retirement. You’re thinking about finally doing the things you enjoy but haven’t had time because of work or life commitments. Your pension is a pot of money that’s invested in a range of investments.

 Your decision to stop working means you need to decide how to use your pension pot to give you the different levels of income you might need, or can afford, as you journey through the rest of your life. This also means understanding how

  • tax might influence your decision
  • you might best invest your pot
  • inflation could impact your pension
  • to understand all the different options available

But one of the fundamental questions is: how long does your income need to last? It’s a fundamental question that’s relevant to everyone.

Finding answers to puzzling pension questions

For many, the answer isn’t obvious. “Nothing is certain except death and taxes” said Benjamin Franklin, while Mohammad Ali encouraged us to “Live everyday as if it were your last, because someday, you’re going to be right.” While Franklin is ultimately correct, Ali points out the uncertainty of life for anyone planning a retirement income.

All our lives will come to an end, but when? How long does a pension income need to last?

No one wants to run out of money when they’re old.

The simplest source of information on how long you might live is the Life Expectancy Calculator provided by the Office for National Statistics (ONS). Pop in your current age and sex, and the ONS will give three pieces of information:

  1. your average life expectancy
  2. the age you have a 1 in 4 chance of living to
  3. the age you have a 1 in 10 chance of living to 

The results might surprise you.

For a female aged 60, the average life expectancy is age 87. Put another way, half the population of women aged 60 today will die before the age of 87 while half will live longer than 87. Half of those still alive at 87 will still be alive at 94 and there is a 1 in 10 chance that a woman aged 60 will celebrate her 98th birthday. 

This means that there’s a 50/50 chance that by planning for a 27-year retirement, a woman aged 60 won’t run out of money. They might be happy to take that risk, but 1 in 4 women will still be alive at 94. If they are amongst the half living past 87, then it could mean living on the state pension for a time.  1 in 4 women might be reliant on their state pension for up to 7 years, with a further 1 in 4 living on the state pension for 7 years or more. 1 in 10 could be dependent on state pension for 11 years or more. 

As they progress through retirement age, their average life expectancy increases. By living longer than some people in the initial population, the average age you may be expected to live will increase. For example, someone aged 87 today will live to 93 (on average) and has a 1 in 4 chance of living to 96.

By signposting and encouraging employees to explore their average life expectancy through the ONS resources, employers and advisers can help promote better informed decision making around pension saving and spending.

A blended pension option may be the answer

To help protect against running out of money, some people may consider buying a guaranteed income for life, called an annuity. This transfers the risk of running out of money to an insurance company. The insurance company can use its expertise to look at individual circumstances, but also average the risk of outliving a pot across many customers.          

The potential downside of an annuity, at earlier retirement ages, is that the wide range of life expectancies, and the need to offer a guaranteed income, can limit the amount provided to those who die earlier than average. It also doesn’t allow for income to vary over time, perhaps paying a higher income in the more active, early years of retirement.       

A solution may be to blend the best of both options, by bringing together the flexibility of income drawdown (in the earlier years) with a guarantee in later life. This could help protect against outliving your pension pot.

Those who have the misfortune to die early can pass their pension pot as a legacy, taking advantage of the attractive tax treatment of pension benefits. Those who live longer can protect against outliving their pot with a guaranteed income.

A pre-packaged, blended solution may also help with decisions around investments, inflation protection, the amount of sustainable income to use in the early years, and when to buy a guaranteed income. Especially for those for whom advice isn’t an option.  

To learn more about how retirement is changing, check out what’s clicking in to place with our guided retirement option.

Dale Critchley, Policy Manager for Workplace Savings and Retirement, is an expert commentator with over 30 years’ experience in a variety of roles within the workplace benefits market. He is an Aviva spokesperson specialising in issues relating to workplace pensions and is regularly featured in the media.

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