In our previous post on risks to consider during a retirement planning exercise, we briefly covered longevity risk. In this post, we expand on how future uncertainties can impact your retirement plans.
There are several unknowns that make any retirement planning exercise difficult,such as:
- How long you (and your spouse) will live.
- Future economic conditions and how investment markets will perform.
- How your health will hold up over time and the potential need for care.
These all contribute to your longevity risk. The risk you will outlive your pension fund and run out of money in retirement.
Below, we only cover the issues surrounding defined contribution pension (workplace or personal) type schemes. Longevity risk is less of an issue for those with final salary (defined benefit) pensions.
Managing Longevity Risk – The Options
There are two main options at retirement annuity or pension drawdown. Each has benefits and risks discussed elsewhere on this blog.
If we only consider longevity then an annuity has real benefits as it continues to pay a set amount per month regardless of how long you may live. Depending on the choice of annuity it may remove some of the risk associated with future economic conditions and possibly cover some care costs.
If you take the pension drawdown option, longevity is a real risk. There is no lifetime guarantee and you could run out of money in retirement. There are various options available to reduce this risk we have discussed elsewhere.
Longevity and care costs
You cannot predict when you (and your spouse) will die. What is certain, as you age the risks of serious illness will increase.
As medical science improves more and more people with chronic illness continue to live in their own homes, often with a level of state funded support. Today, funding that support is increasingly a problem. Who knows if it will continue to be funded in ten years or more.
Let’s hope not but you may need to enter a care home in later life. Care costs vary significantly and can range from approximately £20,000 per year to over £70,000 per year.
The current rules on care costs state if your assets (savings and property value) are greater than £23,250 you are responsible for all your care costs. That said the rules are complex and in some circumstances, it is possible your local authority may pay something towards your care. If you have a qualifying long term health condition the NHS may make a contribution.
A cap on care costs has been proposed by various governments. Commitments have been made only to be later scrapped. The latest proposal (not confirmed) is a cap to be introduced in April 2020. You may read more on that proposal here. In the future it may be possible to buy insurance products to cover care costs. However, if such products do emerge they are likely to come at a high cost.
Longevity is one of the major complicating factors when planning for retirement. It is impossible to define when you may die and what care (if any) you may need in later life. It is therefore impossible to define exactly the fund size required to cover for retirement.
An Annuity can ensure you do not run out of funds in retirement. Drawdown delivers control and flexibility and ensures you can pass any remaining pension on to your beneficiaries. However, drawdown comes with the risk you may run out of money in retirement.
There is no one size fits all solution to the longevity issue. All that can be done is to understand the risks and build a long term plan based on your own specific circumstances.
If you would like to discuss your plans for retirement, please give us a call or complete the form below and we will call you back. Or, if you have a question email us or open a Chat and one of our friendly staff will be happy to help.
This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.