How living longer could affect your pension
As this recent article by Lynda Whitney on BBC News illustrates, it is more important than ever to plan ahead for retirement and explore all the options available. With the retirement age set to be raised and life expectancy increasing all the time, preparing for your golden years is an essential part of working life.
"On average our life expectancy continues to rise. We are going to live longer; not just longer than our parents but even longer than experts thought we would live, just a few years ago. For instance, in 1980, a 65-year old Englishman had a one in 1,000 chance of living to be 100 years old, while, just 30 years later, this figure has increased to one in 100. How do we as a society pay for retirement when retirement itself is getting longer?
The majority of people in the UK significantly underestimate their own life expectancy and, understandably, just over a quarter of people have no idea of just how long they might live.
Yet, being able to plan financially for retirement requires even a basic level of understanding of longevity.
Higher longevity is a growing burden not just for employer pension schemes but also the state and individuals, as they too need to find ways of funding longer retirement. As it currently stands, the state will continue to make an agreed level of pension payment for life from retirement, which presents a huge funding problem for the UK government.
The coalition recently announced it was reviewing the age at which pensioners can draw a state pension. There’s a real possibility of increasing it to age 66 maybe as early as 2016, with further potential increases to the state pension age to follow.
However, longevity is not the only factor people struggle with when planning for their retirement. The bigger-picture problem is the gap between expectation and reality. Looking at the current data showing how much people were saving, when they expected to retire, and their expected retirement income, there is a startling gap between expected retirement income and the reality. The gap has in fact been put at £1.2 trillion – equivalent to 80% of the UK’s gross domestic product (GDP) in 2008.
On an individual basis, the reality gap equates to £50,000 per person of working age, which is equivalent to two years of gross salary for a worker on the UK average salary of £25,000.
What is the answer? Put simply, we drastically need to reassess our expectations of retirement. In living longer, we need to start to consider a ‘triangle of compromise’: save more now; work for longer; or retire on less money."
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Read the full article Pensions: why living longer has become a big problem
