- The number of people aged 100 or over has more than doubled in the last 20 years, with over 15,000 centenarians living in England and Wales in 2022 (Estimates of the very old, including centenarians, England and Wales – Office for National Statistics (ons.gov.uk))
- Over 550,000 people living in England and Wales were aged 90 years or older in 2022, the highest figure on record
- Despite recent falls in life expectancy, Brits still need to prepare for the possibility of their pension needing to sustain them for decades in retirement
- Someone aged 66 today could need a pension pot worth £625,000 to deliver the average UK salary of £35,000 as retirement income to age 100
- AJ Bell considers top tips for savers wanting to make their pension pot last longer
Tom Selby, director of public policy at AJ Bell, comments:
“Despite recent falls in UK life expectancy, the number of people reaching their 100th birthday is higher than it has ever been. While none of us know exactly when we are going to die, it is important to plan for the possibility your pension will need to sustain you for decades in retirement.
“In an independent survey commissioned by AJ Bell*, savers aged 55 to 59 who had entered ‘drawdown’ (meaning they manage their retirement pot while taking an income flexibly) on average thought they would live for 21 more years.
“In fact, according to official projections from the Office for National Statistics (ONS), a healthy 55-year-old man has an average life expectancy of 84 – meaning those in the 55 to 59 cohort could be underestimating life expectancy by up to eight years. A 55-year-old woman can expect to live until age 87 on average**.
“But many people will live well beyond the average. ONS analysis suggests a 55-year-old man has a one in four probability of reaching age 92 and a 4% chance of celebrating their 100th birthday. The equivalent woman has a 1 in 4 chance of reaching age 95 and a 7% chance of celebrating her centenary.
“If long-term life expectancy improvements continue, younger generations will become increasingly likely to reach three figures. It is therefore crucial to save as much as you can afford, as early as possible, making the most of employer contributions and the bonus of pension tax relief.”
Making your pension last to age 100
The surest way to make your pension last a lifetime is to buy an inflation-protected annuity – an insurance product which pays a guaranteed income for life.
If you’re going to go down this route, shopping around for the best rate – and making sure your provider knows of any health conditions which might impact on your life expectancy – is essential.
However, annuities are inflexible and irreversible. Many people, particularly younger retirees, prefer to keep their money invested through drawdown, providing more flexibility and the potential to enjoy long-term investment growth. Those choosing drawdown need to engage with their fund and ensure, among other things, they withdraw their money sustainably.
The extent to which a withdrawal strategy in drawdown is sustainable will depend on a number of things including overall investment returns, the timing of those returns, inflation and, crucially, how long the person lives for.
If someone wants to retire today on an average UK salary of around £35,000, they might expect around £10,600 of that to come from their state pension (based on the flat-rate amount in 2023/24). This would mean their private pension needs to deliver an income of £24,400 per year.
If we ignore tax-free cash and assume 4% annual investment growth, a 66-year-old could need a pension fund of around £625,000 to be able to withdraw £24,400 a year, inflation-linked at 2%, and still see their pension last until age 100.
However, if they delay retirement five years to age 70, the size of pension fund needed to reach age 100 could reduce to around £575,000.
Savings levels required
The best way to ensure a comfortable retirement is to start saving early and often. To save £625,000, a 25-year-old could need to put away around £4,200 a year in total (inclusive of tax relief and any employer contributions), or £350 a month. This assumes contributions increase by 2% each year and investment returns after charges are 4% per year.
Delaying by 10 years to start saving at age 35 sees the saving target almost double to £7,500 a year (£625 per month), and if you wait until age 45 it rises to over £14,500 a year (around £1,200 per month).
If these amounts sound unrealistic, it’s still worth saving what you can, making the most of the bonus of pension tax relief and any available employer contributions.
You also need to think carefully about the investment risk you want to take. Younger investors, in particular, should be able to take more risk than their older counterparts, giving their fund the chance to grow over time. In addition, high charges can have a seriously detrimental impact on your retirement over the long-term, so shopping around is absolutely critical.
If people get this bit right and build a decent pension pot in the first place, it becomes much easier to make that pot last – even over a lengthy retirement.
Five top tips to ensure you don’t run out of money in retirement
- Set a reasonable income target. Financial planners often say 3-4% of your initial fund value, with income increasing in line with inflation, is a decent starting point for a healthy person at state pension age (currently 66). You might be able to take more than this if you retire later (or have other income sources), and less if you retire earlier. You might also be able to take more than this if you have other income sources or below-average life expectancy.
- Make a budget and try to stick to it. This will help ensure you stick to your spending limits during retirement.
- Shop around the market and keep costs as low as possible. This will help ensure your fund isn’t eaten up by unnecessary charges.
- Get all your pensions in one place if you can (but be careful not to lose any valuable guarantees in the process). Savers often lose track of pensions during their lifetime, potentially leaving them facing an income shortfall in retirement. Having all your pensions with one provider should make managing them a lot easier.
- Review your investments, provider and withdrawal strategy regularly (at least once a year). If your funds have performed well, you might be able to increase your withdrawals. Equally, if they’ve struggled you might need to think about cutting back your income.
*Source: AJ Bell research (2019)
**Source: ONS life expectancy calculator Life expectancy calculator - Office for National Statistics (ons.gov.uk)
