Retirees risk running out of money by underestimating life expectancy

British workers are underestimating their life expectancy resulting in them not saving enough for their retirement, new research by Scottish Widows reveals.

According to Scottish Widows, the average adult expects to live until they are 82 and retire at 65, however the average life expectancy of UK adults saving for retirement is in fact 87 years. The five extra years could require an additional £80,000 in pension savings.

In addition to this, those heading towards retirement have no plans in place about how they will fund their retirement, with one in 10 (10%) over-50s not knowing how they will fund their income while 28% fear running out of money in retirement. Furthermore, among over-50s who are not retired and do not have a defined benefit pension, only 9% plan to buy a product that provides a secure income for life, such as an annuity.

Those nearing retirement should have a clear plan in place on how they will fund their retirement years and, ideally, speak to an independent financial advisor to ensure they make the best choices for their later years.

Prior to the Pension Freedom Acts 2015, purchasing an annuity was the only way for those entering retirement to secure an income for life. The Pensions Freedom Act enabled retirees to have more control over the money within their pension pots and, while an annuity is not the right choice for all, it still offers those in retirement the security of an income for life. An annuity is purchased once a person retires using money saved in their pension pot. For more information about annuities, read our guide How to choose the best annuity.

Emma Watkins, annuities director at Scottish Widows, said: “Life expectancy has grown substantially in the last 60 years and now one in 10 people will live to be 100. As the concept of the three-stage life is becoming out of date, people facing into retirement are also facing a trade-off between saving more, working longer or having a clearer plan.

“Pension Freedoms opened the door to new opportunities and flexibility for savers, but advice on the best way to put in place a stable, predictable income for life would give some comfort to those facing a retirement that could last more than 20 years.”

Richard Eagling, head of pensions at Moneyfactscompare.co.uk, said: “Understanding longevity risk is an essential part of retirement planning, as the ultimate retirement nightmare is running out of retirement income, either because money has been taken from a pension pot too quickly or because insufficient funds were built up in the first place. This is becoming an even greater issue as more individuals have turned to drawdown since the pensions freedoms and in doing so have taken on the longevity risk for themselves. Annuities are still the only product offering a guaranteed income for life, but even individuals that opt for this security will need to have some understanding of how long they could live for, in order to build up sufficient pension funds.”