Longevity misjudgements may adversely impact pension income and expenditure

Increasing longevity misjudgements could adversely impact pension savers' income and expenditure in retirement, the IFS Retirement Savings Consortium has reported.

A new report by the IFS Retirement Savings Consortium and the Economic and Social Research Council, assessed longevity assumptions of individuals in their 50-80s, finding that individuals from a range of ages underestimate their chances of survival to ages 75, 80 and 85 on average.

The IFS has noted that the increasing “pessimism” regarding life expectancy could lead to individuals saving less during their working life into a pension and spending more in their early years of retirement than advised.

The report highlighted that those in their 50s and 60s underestimate their chances of survival to age 75 by around 20 percentage points and to age 85 by around five to 10 percentage points in comparison to ONS survival rates.

As a result of lowered expectations, individuals may be reluctant to buy annuities,the IFS suggested. While an annuity priced in line with average survival rates should offer a fair, or better, deal for around half of pensioners, individuals’ own survival expectations suggest that two thirds of individuals in their 60s would perceive these annuities as offering a less fair deal, the IFS argued.

In contrast, however, the report highlighted that on average, individuals in their late 70s and 80s overestimate their chances of living to 90, 95 and above. With this, individuals that live past their 80s may be reluctant to spend down their wealth and ultimately reduce their overall living standards, it has been noted.

IFS research economist and an author of the report David Sturrock said: “As individuals are given more responsibility for saving for their retirement, and more freedom over how they use those savings in their later years, it is a particular concern that many are systematically misjudging their longevity. When people underestimate their chances of surviving through their 50s, 60s and 70s they may save less during working life, and spend more in the earlier years of retirement, than is appropriate given their actual survival chances.

“In contrast, people who overestimate their survival chances at the oldest ages may show an undue reluctance to spend their remaining wealth near the end of life. By misjudging their longevity, individuals risk having a lower standard of living in retirement than would otherwise be possible.”

Also commenting on the findings, AJ Bell senior analyst Tom Selby added: “If large numbers of people massively underestimate life expectancy and spend too much in retirement as a result, they risk running out of money early and potentially falling back on the state.

“The combination of underestimating life expectancy, overestimating investment returns and overspending could create a perfect storm for future retirees.”

Nonetheless, Selby stated that auto-enrolment should “help ensure” that members do not “massively under-save“ for retirement. Instead, it is now essential to drive pension engagement among savers, he said.

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