Over-50s set to live longer but not prosper, report warns

30 November 2012

The over-50s are underestimating how long they will live and are over-optimistic about how well off they will be in their retirement, particularly given the low annuity rates on offer, new research by pensions experts warned today.

A report by the Institute for Fiscal Studies (IFS) supported by the NAPF found that:

·         women in their 50s are undershooting their life expectancy by around four years, predicting 84 instead of 88, while men are doing so by around two years (stating 83 instead of 85), when compared to national projections of life expectancy.

·         those approaching retirement (aged 50 to 64) with a ‘defined contribution’ (DC) pension are too optimistic about what their retirement income will be. On average their DC pension pot would have to grow by 77%, or £20,200, to reach their expected income.

·         Of those aged 50 to 64, one in four would need to save more than £60,000 before retirement to attain the income they expect. And six out of ten (59%) have never thought about how many years of retirement they might need to finance.

·         A third (32%) of those aged 52 to 64 could not offer even a rough estimate of what their private pension income in retirement might be.

The report showed how the over-50s are facing the blessing of rising longevity with the need to make adequate pensions provision, particularly when their pension is the ‘defined contribution’ (DC) type that is replacing final salary pensions in the private sector.

When combined with the current climate of very low annuity rates, many are likely to feel short-changed when they convert their pension into an annuity, the NAPF said.

Joanne Segars, Chief Executive of the NAPF, said:

“Fortunately, people are going to live longer than they think, but they are not planning for it, so they might find their savings and pension do not stretch far enough.

“Millions of people are within a decade of their state pension but have still not thought about how long their retirement might last. It’s worrying that so many over-50s are sleepwalking into their old age and are expecting to be better off than they will be. It does not help that the annuity market has become so tough.

“The average saver with a defined contribution pension is being over-optimistic. They need to see their pension pot grow by almost 80 per cent to meet their expectations. That is a huge ask if they are only a few years away from their retirement party.

“Over a third do not have even a rough idea of what their pensions might pay out. It is essential to give your workplace pension a regular health check, to see what it might deliver. It is not too late for the over-50s to take some control of their retirement plans by adjusting the amount they save, or how long they are prepared to work for.”

The study also highlighted the importance of shopping around for the best annuity rate when converting a DC pension into an income stream. It found that, in recent years, only 28% of those annuitising bought one from a provider other than the firm they hold their pension with, suggesting people are not making the most of their savings pots. Those who used the internet were twice as likely to buy an annuity from a company that did not provide their pension.

The report can be found here.