A third of retirees will live for more than 30 years
However, research from the company finds that retirees are highly likely to underestimate their life expectancy, with 25% of adults expecting to live between 16 and 20 years after retiring at 65 and 20% expecting to live for between 11 and 15 years.
Using data from the Office for National Statistics, Partnership says that at age 65, the average man can actually expect to live for another 21.5 years while the typical woman is likely to have a life expectancy of 23.7 years at age 65.
Partnership warns that this mismatch between expected and likely life expectancy can cause significant problems for investors that choose to invest their pension for income.
Indeed, even planning finances around ‘average’ life expectancy could cause some retirees to run out of money if they live longer than expected.
This provides retirees with a guaranteed income to pay the bills along with capital that can be invested to cover ad hoc expenses and to guard against inflation.
‘It’s vital people guard against underestimating vitality’
Commenting on the ONS data, Richard Willetts, director of longevity at Partnership says: “Most people will work a margin of error into their retirement income planning, but 10 or more years is a significant period of time to make up from a finite pot of assets.
“Even those who have studied this subject extensively would struggle to definitively answer the question – how long will a specific individual live - so it is vital that people ensure they have some mechanism to guard against the consequences of underestimating their own vitality.”
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.