Living to 100 can be financially ruinous – how to ensure you’re prepared

Today, around 50 Britons will celebrate their centenary: happy birthday to all of them. In 1926, the year they were born, life expectancy at birth was around 56 for men and 59 for women. At the time, the newly launched contributory state pension kicked in at 65, and retirement was brief and often impoverished. How times have changed. Now, most people stop working in the first half of their 60s, typically with decades of life ahead of them, thanks to improved medical care and healthier lifestyles. Today a 60-year-old British man can expect to live another 24 years and has a 33.8 per cent chance of celebrating his 90th birthday. A 60-year-old British woman can look forward to another 27 years of life, with almost half reaching the big nine-oh. That is all good news. But with increasing longevity comes a challenge: how to make that finite pension pot stretch to the end of the road. Preparing your finances for a longer life While overall lifespans are increasing, the length of time spent in good health is dropping, and has fallen by two years to just 61 years over the past decade, according to official figures. The implications are stark. The average lifetime care bill in the UK is £45,000, according to Government figures. One in seven will pay £100,000 or more. By contrast, the average private pension pot for someone aged 65 to 74 is just £145,000. Many are much smaller. Many people will worry about not saving enough for retirement (Photo: Alex Tihonov/Getty) Predicting the future – including how long you will live or whether you will need care – is impossible. But millions of British savers are woefully underestimating the time they have left – and how long their pension pot must last – as they approach retirement. That is often because they base their own estimates of mortality on how long their parents and grandparents lived, in an age of much shorter average lifespans. Clare Moffat, a pensions expert at Royal London, explains: ”My grandfather lived until he was 101 but refused to do anything about his pension until he was 57; and that simply was because his dad and uncles died when they were 57.” Research from Aviva shows that nearly a third of retirees in their seventies have already outlived the age they expected to reach when they were in their 50s. More than three-quarters still did not expect to live beyond 85, although many will. The financial reality of living to 100 Today, an estimated 16,600 centurions are living in England and Wales. Not planning accordingly can be devastating and the financial arithmetic of longevity in poor health can be particularly alarming. Someone retiring at age 65 with a typical pot of £200,000 could expect an income of £10,000 a year on top of their state pension, for the rest of their expected lifespan of around 20 years. But what if that same person suffers a major decline in their health at 80 that requires care? The most affordable level of care – weekly visits while still living at home – costs £15,000 to £20,000 a year. The bill for residential homes or live-in carers can be up to £70,000 or £80,000 a year. Even with the cheapest level of care, a decent-sized pension pot could be hollowed out within five years. For someone who survives into their nineties in ill health, that pension nest egg carefully built up over a working lifetime will likely be long gone, leaving them reliant on the state pension of £12,547 and any help they are entitled to from their local authority once savings and capital have been reduced to below £23,250. So how can you make sure your pension pot lasts the distance? How to plan for the future A good first step is simply to work out how much you can expect from the state, and the total you have in any private pots. It may be more than you think. You can get an accurate forecast of your state pension on the Government website. Typically, you need 35 years of qualifying national insurance (NI) contributions to get the full amount. It is possible to fill in missing years to boost your entitlement. Those retiring before state pension age to care for grandchildren under the age of 12 can top up their NI contributions through “specified adult childcare credits”, says Moffat. Use the Government’s pension tracing service to hunt down any pension pots that have gone missing or been forgotten about. It may make sense to consolidate your savings into one place to make it easier to keep track – but check what type of pension you have first, or you could lose valuable benefits by moving your pot. Defined benefit pension schemes, also known as final salary pensions, provide a guaranteed income for life. These used to be common, but these days are all but extinct unless you work in the public sector. With defined contribution schemes ( the most common type today), the amount you end up with in retirement depends on how much you save and how your investments perform. At retirement, you can use the pot to buy an annuity (which pays an income for life) or leave the money invested and draw down from it as you need. The next step is to assess how much you will need to live on in retirement. “It’s really important to try to make a budget, even if you don’t know exactly what you’ll spend in retirement,” says Carolyn Jones, retirement director at Scottish Widows. “Online calculators can help you form what a likely budget could look like.” Don’t forget housing costs, says Jones. About 20 per cent of people going into retirement are renters. The next big question might be whether to withdraw your tax-free lump sum. Currently, you can take out 25 per cent of your pot entirely tax-free, up to a maximum of £268,275 from age 55 (rising to age 57 from 2028). According to research from Royal London, about 55 per cent of people take out the maximum tax-free cash. But this is not always the right thing to do. Sometimes it is earmarked for a specific use such as paying off the mortgage or helping offspring with a house deposit. But often, the money just gets parked in a bank account, which means it will lose value against inflation, could affect your entitlement to certain benefits, and may even land you with a tax bill if you earn interest on the cash. What else to consider While an annuity – a retirement income bought with your pension pot – used to be the go-to option, since the introduction of Pension Freedoms in 2015, more people choose to leave their money invested and draw down from it as they need to. But doing this successfully is a careful balancing act. The risk is that you draw too much early in retirement and leave yourself short later. You also don’t want to risk tapping into your pot after a market fall. To avoid this, Carolyn Jones of Scottish Widows recommends keeping 18-24 months’ of outgoings in an easy-access account for any “just in case” scenarios. A “mix and match” approach can also work. Do the maths to work out how much you need to cover your basic expenditure. Subtract from this your state pension entitlement. You could then withdraw enough from your pot to buy an annuity that covers the difference. For example, if you need an income of £20,000 a year, and you get the full state pension, you would withdraw enough to buy an annuity that pays around £7,500 a year. The rest can then be left invested and drawn down for extra luxuries – or if your outgoings increase in later life or when the need for care arises. This hybrid approach gives peace of mind that your essentials are covered without tying you into a full-scale annuity. But there is another danger to consider: many pensioners are spending too little. Some retirees are so anxious about using up all their funds too soon, or not having anything left to leave as an inheritance, that they are living a more frugal life than they need to. According to Alistair McQueen, head of savings and retirement at Aviva, the number of people who totally drain their pension pots is relatively low. He says: “The statistics show the very moderate way in which people are using their pensions cash in retirement to such an extent that you could ask, ‘Are we as a society being too cautious and in greater deprivation than is needed in retirement?’ There’s more swinging in that way than spending too quickly.” Of course, it is hard to get the balance right, and many people would rather be left with too much than too little at the end of their lives. But with reasonable planning and a hybrid approach, today’s 65-year-olds can avoid impoverishment in old age.