As more of us live into our ninth and tenth decades, the funding of long retirements will become the most pressing financial issue for future generations. Even the prospect of a 100-year life is becoming a more likely reality for a growing number of people, says Lucie Spencer, director in financial planning at Evelyn Partners.
The number of centenarians in the UK hit record highs in 2021, according to recent official figures, which revealed the count more than doubling since 1991 to 13,925 - the second-highest number in Europe after France. This might surprise those who have seen media reports of average life expectancy in the UK falling back a little.
The Covid pandemic had what is hopefully a one-off impact on recent life expectancy data, but also the current average expectancy of 79-82 years hides some very significant differences across the population.
For many better-off people who have worked in white-collar jobs, maintained healthy lifestyles and managed largely to avoid chronic illness, their likely age at death will be much higher. Within the current UK population, around 3.2 million people are aged more than 80 years.
So even someone waiting until the state pension age of 67 to retire could quite easily need 25 years of pension income. And this is a crucial matter, as obviously no one wants to spend their later years in strained financial circumstances or in ill health. And while the latter is partially out of our control, it's not entirely unrelated to financial security and the comfort - both physical and mental - that sufficient savings can provide.
While some outgoings might moderate in the later phase of retirement, others such as care, medical and heating costs could place a greater demand on incomes, so we would encourage the young and middle-aged workers of today to think carefully about the prospect of living well into their nineties.
So how much do today's workers need to be saving to prepare them for living into their nineties?
The Pensions and Lifetime Savings Association estimates that for a bare minimum standard of living in retirement, a single retiree living outside of London would need a total annual income (including the full state pension) in today's prices of £12,800; going up to £23,300 a year for a moderate standard of living; and for a comfortable retirement £37,300. [4]
Evelyn Partners crunched the numbers to see what that means for defined contribution savers in terms of the size of pension pot required at state pension age for a retiree to maintain those income levels from drawdown.
We assumed the saver takes the full state pension at age 67, which increases with the triple lock, that they take their 25% tax free lump sum at the same point, that their income keeps pace with inflation at 2% a year and their drawdown fund grows 5% annually.
Even for the minimum standard of living, which the PLSA thinks could be managed with a private income on top of the state pension of £2,200 a year, a pension fund of £17,500 is required. That is quite significant given that the ONS estimates almost a third of people do not expect to have any pension provision beyond the state pension when they retire.[5]
But the required pot rises to a hefty £638,000 to maintain the PLSA's ‘comfortable' standard of living with a total annual income of £37,300 until age 100, which is startling when you consider that the average pension wealth of those between 55 and state pension age is just £37,600, according to the ONS.[6] All this goes to show that today's workers need to take personal saving towards retirement very seriously, if they are not to risk a big drop in their standard of living - particularly given the ongoing uncertainty over the affordability of the state pension and triple lock in their current form.
If we look at an annuity to provide that ‘comfortable' level of income, then recent quotes are coming in at about £443,000 for a single life, good health annuity at age 67 that increases at 2% pa but with no other guarantees - which means a pot of £591,000 if the tax-free lump sum was taken in full. This reflects the greater value that lifetime annuities can provide for those who live well beyond average life expectancy."
Even these substantial estimated sums for required pension pots could be on the low side.
We used a 2% assumption for inflation as that is the Bank of England target but it's widely suspected that the rate could remain above that in the medium and even the long term, so that drawdown pots risk being depleted more rapidly unless investment returns can compensate. Moreover, the rate of inflation for those aged 80+ is likely to be higher than the average due to the make-up of the basket of goods and services that they tend to consume. Increases in care home fees and heating costs, for instance, tend to have a higher impact on people over age 80.
Crucially our numbers also assume that the retiree manages their drawdown pot and withdrawals from it very carefully, which usually requires help from a financial planner. Also, the pot is run down in retirement to pretty much zero on death at age 100, but when speaking with clients who are over 80, one of their biggest concerns is around the transfer of wealth - or what they want to leave to their family, and how best to do it.
They are concerned about inheritance tax planning, but also want to retain access to capital should they need it in the future to pay for care, for instance, which can be a tricky balance to get right. The majority of clients who we speak with don't wish for their beneficiaries to have to pay the inheritance tax bill but also are aware of the costs associated with going into a care home so don't wish to gift the funds away. This is potentially an area where trusts can be useful.
One of the major income challenges for married clients who are over 80 is that most of the pension income, from for instance a final salary scheme, can be received by one partner. If that individual needs to go into care and some of the income put towards this cost, or if they die before their spouse, this can then leave the surviving spouse in financial hardship. They will receive a reduced amount coming in, but with many bills remaining the same or only marginally reduced.
A large proportion of elderly individuals hold much of their wealth within their home, thanks to the inflation in property prices over the last 40-plus years. This can leave them with a difficult decision should they need to have additional income or capital in their later years. As well as the emotional attachment to a home, the stresses and costs of moving, including a sometimes substantial stamp duty bill, can make the decision to downsize and free up property wealth a difficult one. Many older clients who wish to remain at home may need adaptations to their property to enable them to continue to live there in comfort, all of which needs to be factored into their financial needs.
Finally, the elderly are more likely to be targeted by fraudsters. Age UK found in 2019 that an older person (65+) becomes a victim of fraud every 40 seconds. Therefore, when looking at the providing financial advice and guidance to clients who are older, especially those who are 80-pluswho haven't grown up with technology, we need to support them so they don't fall victim to these scams.
By Lucie Spencer, director in financial planning at Evelyn Partners
