Scoring a personal century used to be rare. But the number of centenarians in the UK rose to its highest ever level in 2020, reaching 15,120, an increase of almost a fifth from last year.
Medical science, and baby booms after two world wars may be responsible, but the number of people living past 100 is forecast to triple over the next three decades. The Office for National Statistics expects there to be 51,000 by 2050 (according to the 2021 census). Your chances of a telegram from the King may have increased. But what about your pension?
Will you run out of money?
Traditional retirement savings models were designed around shorter retirement spans. People retired at 60 or 65 and might see their 70s if they were lucky. These days, we can hope to do better than that.
The average life expectancy for those who are 65 today is 84 for men and 86 for women, and many pensions are planned with this in mind. But someone who lives to 100 might need very much more in their pension pot, for the simple reason that they will have many more years of living to fund.
Those years might be expensive. Rather than tightening the purse strings, many people spend more as they get older. Holidays abroad and evenings out may lose their appeal, but while spending on fun and entertainment may fall, the cost of home help, care and cleaning services will start to climb.
You might find that you actually need more money as you get closer to 100, especially if you have medical problems that will make your care costly.
So how can you be sure of having the income you need?
An annuity will still pay
If you opt for an annuity, this might appear not to be a problem. In return for your pension pot lump sum, your annuity provider will be paying you an income for the rest of your life.
If you do reach your centenary, you have been receiving your annuity for around 35 years. Your provider will have given you back more than it received in your pension pot several times over. But unless you opted for an inflation- linked annuity (which can be much more expensive) your income will be fixed – while the prices of the things you need are not.
That annuity that seemed so generous when you retired at 65 might be painfully inadequate 20 years later and leave you in misery by the time that 100th birthday rolls round.
But you may prefer drawdown
These days more people choose to keep their pot invested and withdraw an income from it through a process known as drawdown. You could still enjoy capital growth from the part of your pension pot that stays invested, which could mean your pension pot can continue to fund the lifestyle you want.
But it is your responsibility to decide what level of income you can afford to withdraw while ensuring that your money doesn’t run out. This is not easy, especially if a pension must last until you are 100.
Calculating the pension income you need
To calculate the pension for a retirement that edges in to your second century, you need to start with your lifestyle. The current consensus suggests the following figures.
- For a minimum lifestyle: £10,900 - £12,800 for a single person, £16,700 - £19,900 for a couple.
- For a moderate lifestyle: £23,300 for a single person, £34,000 for a couple.
- For a comfortable lifestyle: £37,300 for a single person, £54,400 for a couple.
Then consider Inflation: Inflation is a constant wealth eroder. When projecting expenses for a long retirement, it's crucial to consider the impact of inflation on purchasing power. You need to estimate the income you will need in 10, 20 and perhaps 40 years to maintain your standard of living – and deal with the extra costs such as care.
You might need to double these figures in 30 years’ time, even if inflation ever falls closer to 2%.
With a drawdown arrangement you can take the income you want from your pension pot, at least until the funds run out. Funding a ‘ moderate’ lifestyle for 35 years as a couple would seem to require around £700,00 even before allowing for inflation.
But there is some good news, even if your pension pot falls short of that figure. With some help from the Continuum team, you may be able to invest your pension pot to provide the income you need without eating into your capital – giving you an income which could potentially last as long as you do.
What to do?
You can work out what your investment returns need to be and when and where you can draw your income from. If you’ve done your planning, you will have access to a number of income sources – personal pension, state pension, ISAs, investment accounts, annuities and cash. You can then work out the most tax efficient and sensible way to fund your chosen lifestyle using all the allowances available to you. In this way you may never run out of money.
We can help you look at the figures and start a retirement strategy designed around them.
This needs to be planned and a good financial planner can help you. This is done by evaluating your possible living costs over the years and factoring in possibilities like holidays and care costs. Using that information, and making allowances for inflation, a cash flow forecast can be prepared up to your age 100. With that information you can work out how much capital you will require and how to fund it.
Later life need not be a restricted life. It can be full of purpose and meaning but it does require plenty of advance thought and evaluation if you are to avoid restricted choice and less comfort.
Call us today to find out more.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
A pension is a long term investment, the fund value can go down as well as up and this can impact the level of pension benefits available.
Estimates of the very old, including centenarians, UK - Office for National Statistics (ons.gov.uk)
Pensions: Experts say £10,900 a year needed to retire - BBC NewsJump of nearly 20% in amounts needed for minimum living standards in retirement
