Could your pension last to your 100th birthday? Here's how

The number of people aged 100 or more has doubled over the past 20 years, raising the point that as life expectancy continues to grow so to must our pension calculations.

According to the latest government figures, there were 15,172 people who were at least 100 years old, two thirds of which were women.

When you’re planning for retirement, it’s easy to consider your own parents or grandparents as a benchmark, and assume you’ll live roughly as long.

However, this could mean you vastly underestimate how long you’ll live for – and how long your retirement income needs to last. This means that we all need to consider how we would keep paying the bills if we lived longer than average.

Let's do the pension math's

The first step is to use a pension calculator to see what you may be able to build by retirement and how long the income is likely to last. If there’s a shortfall, it’s worth considering boosting your pension contributions, planning for a longer working life, or rethinking your income expectations in your later years.

Most of these calculators will give you the option of factoring in the state pension. It’s worth doing the calculations both with and without, to see where you stand.

Nobody is suggesting that the state pension will disappear, but there’s always the chance the state pension age will rise or the triple lock will be replaced. When you’re forecasting so far ahead, you can’t guarantee state benefits will remain completely unchanged.

How you take retirement income matters

Drawdown offers real flexibility over how much you take from your pension, and when. It also gives you the opportunity to leave the pot invested for more growth throughout your retirement.

Plus, when you die, you can leave any unused pot to your family. However, as retirements get longer, it will be essential to ensure the money doesn’t run dry if you make it into your 90s or beyond.

It’s worth using an online drawdown calculator to see whether the withdrawals you want to make are likely to be sustainable. However, this can only ever be based on estimates, and you’ll face what’s known as sequencing risk.

This is where disappointing investment performance in the early years, coupled with larger withdrawals, can mean your pension doesn’t last as long as you had expected. Find out if your pension is ahead of your friends in our recent article.

One way around this is a variable withdrawal strategy. The idea is to determine how much you can afford to withdraw from your pension in any given year – weighing up things like how the fund has performed, the value of the portfolio and your remaining life expectancy.

The idea is to adapt to market performance, so at times of market losses, you don’t end up eating into the capital. Then at times of better performance, you can afford to dip further into your funds.

This strategy can be complicated, so you may want to seek out some formal financial advice. Alternatively, some people will opt for a hybrid approach, with higher and lower limits over how much they take from the pension, based on performance and income needs. Others will opt to take a fixed percentage of the pot, but will revisit it regularly to make sure they’re not eroding their pot.

A variation on this theme, which can work for those with large pension pots, is to take just the natural yield from your investments. This is where you take the income from dividends produced by your investments, so you don’t eat into the capital itself.

This means the pot continues to grow and has the potential to keep up with inflation. You will need a substantial pot, with enough savings and investments elsewhere to give you flexibility over how much income you can take, but it’s a great way not only to protect an income for life, but also to give you flexibility if you need to dip into the pot for care needs.

If you opt for an annuity, you will have an income for life – regardless of how long you live. However, with a longer retirement it will be particularly important to consider inflation.

Prices in general have more than doubled in the past 30 years, so you need to understand the impact on your quality of life. You can opt for an inflation-linked annuity to overcome this, but you need to accept that the initial income will be much lower.

Taking the annuity route offers certainty, but it removes flexibility over how much income you can take, so you also need to think about how you would cover the cost of any one-offs, like adapting your home as you get older or replacing your car. It’s one reason why people often combine annuities and drawdown, either at the same time or at different stages of life.