New figures have confirmed what has been suspected for some time, we are all living longer.
The figures produced by the Department for Work & Pensions forecast that almost 1 in 5 of us will live to see our 100th birthday.
Of the 17 per cent of the population who will become centenarians, about three million are currently under the age of 16, and 5.5 million are aged between 16 and 50.
In total, about half a million people a year will be celebrating their 100th birthday by 2066, compared with about 10,000 now. Nearly 8,000 of them will reach their 110th birthday.
So, how does living longer affect your pension?
The most obvious problem is that your ‘pension pot’ has to last longer; this will mean if we want our retirement goals to remain unchanged we will need larger pension funds.
Increased longevity will also push down Annuity rates as actuaries increase their assumptions for our likely life expectancy.
Defined benefits schemes, also known as Final Salary pensions, will also be affected; indeed changes to many schemes are already being made. Benefits may be reduced; alternatively actuaries could increase contributions from employees, employers or both.
Inflation will have longer to erode the buying power of your income. We have previously highlighted the fact that older generations suffer higher rates of inflation, click here to be taken to that article. This higher inflation rate coupled with increased life expectancy could significantly erode the buying power of a level Annuity.
Who is most affected?
The three million people currently under the age of 16 who will live to be 100 will certainly have to save more for their retirement or even delay the date they finish working. However, age is on their side, they have time to plan.
The first group who are immediately affected by increased longevity are the 1.3 million, currently aged between 51 and 65 who will live to get their telegram from whoever is on the throne at that time.
Next come a group of some 875,000 people, who have already retired and will live to be 100. These people are severely affected by increased longevity as unless they already have sufficient income, it is unlikely that they will find additional ways to create wealth.
How should I alter my planning?
The fundamental method of retirement planning has not changed. Start by thinking about your retirement goals, namely when you want to retire and on what level of income, then work backwards to seeing how much you need to put to one side.
However, if you want to keep your retirement goals unchanged then longer life expectancy will mean that a larger pension pot is going to be needed.
Additional flexibility may be required, for example, the State pension age has been pushed back, but you may still want to retire as planned at say 65. You may therefore need greater flexibility to take a higher income from your pension until your State pension starts.
If you are thinking of retiring soon, you will no doubt be thinking about the best option for you. Should you buy an Annuity? Is Income Drawdown the best option? Whatever route you take, increased longevity puts the question of a level versus index linked pension back on the table.
Unless something changes, for example larger contributions, reduced income expectations or later retirement ages, future generations will not be able to expect the same pension benefits as those who have retired in previous years.
However, all is not lost, careful planning with a few tweaks, maybe increased contributions, may mean you can still achieve your original retirement goals.
To do this, planning is essential. If you are many years from retirement, your current pension contributions will be invested for the longest period of time, they need to work hard for you. If you are close to retirement, you have less time to make up any shortfall, careful planning is therefore essential.
Our advisers are here to help; they are experienced in helping clients achieve their retirement goals.
Talk to an adviser without obligation by calling us on 0845 074 7778 or 0115 933 8433, we really are here to help.