Living longer has a downside. But it doesn't have to be that way.
Last year, 20,000 people had an unexpected gift: life. That's the number of people who should have died, but didn't, according to figures released by The Actuarial Profession, the collective name for the Institute and Faculty of Actuaries.
Apparently, there has been a sudden and considerable improvement in the mortality rate. Instead of improving at an average annual rate of 2.4% or so -- the rate over the last 10 years -- in 2011 it climbed to 4%.
"The last 20 years have seen unprecedented improvements in mortality rates, particularly for pensioners," says Actuarial Profession spokesperson Gordon Sharp.
And while this initial estimate is subject to revision once the Office for National Statistics publish updated population estimates for 2011, the uptick is large enough for the organisation to be confident that it's real.
"We are able to say with confidence that the mortality improvement for 2011 has been well above average," sums up Mr Sharp. "This means that there have been 20,000 fewer deaths than would have been expected -- enough people to fill the O2 Arena in London."
An extra three years
What's shocking about these figures from the Institute and Faculty of Actuaries is the further impact that they might have on longevity.
Ross Matthews, the head of mortality research at actuarial and pension fund investment advisors Punter Southall, for instance, reckons that if the 2011 fall in mortality rates continued, a man of 65 retiring today could expect to live to 91, three years longer than the typical current estimate of 88.
Of course, such projections need treating carefully: while average lifespans are getting longer, the increase can't go on forever.
But even so, warns Tom McPhail, head of pensions research at Hargreaves Lansdown (LSE: HL), actual life expectancy over the last few decades has consistently overshot expectations. In other words, far from overstating the likely longer life span of pensioners, such figures could actually be underestimating the real impact of declining mortality.
Falling annuity rates
Of course, it's no surprise that fewer people are dying. It's well known that average longevity figures are climbing.
We've already seen that reflected in annuity rates, of course -- with annuity providers having to pay out for longer, annuities have declined sharply. The recession and quantitative easing haven't helped, either.
Back in 2008, points out Hargreaves Lansdown's McPhail, a 65-year old man seeking an annuity with a five-year guarantee could expect pension savings of £100,000 to generate an annual income of £7,800 or so.
Today, that figure is below £6,000 -- and that's before today's announcement of a further £50 billion of quantitative easing has hit the markets.
For comparison, that same pensioner retiring in the early 1990s could have expected £15,000 or so -- a shocking collapse in retirement prospects.
Stretched savings
Roll it all together, and the impact is obvious -- and sobering.
Simply put, all those scaremongering articles you read last year, warning that people weren't saving enough, in fact probably weren't doom-laden enough.
Your pension savings are going to have to sustain you for rather longer than you thought -- a further three years or so, if you're around 65 now, and rather longer if you're younger.
Punter Southall's Ross Matthews, for instance, reckons that a 45-year-old could live to 95, seven years longer than today's cohort life expectancy.
And unless people's pension provision improves, those years are going to be pretty grim, as meagre savings are stretched even further.
Five-point plan
What to do? There isn't, sadly, a magic bullet.
But I reckon that the five-point plan below could help stack the odds of a better retirement a little further in your favour:
- Retire later. Because your pension won't have to sustain you as long, you'll get a better annuity income.
- Save more into your pension fund, be that a pension or an ISA. Retiring later will help with that, of course -- but upping your savings rate now will give those savings longer to compound up to a decent figure.
- Invest wisely. Cash savings deliver a meagre return, but a stocks and shares ISA should do better, and a SIPP will benefit from tax relief, as well -- an important consideration if you're a higher-rate taxpayer.
- Shop around for annuities. Again and again, we hear of poor deals, and people losing out by staying with their current provider. Don't.
- Diversify your income mix. The longer you live, the more your income is at risk of an unexpected buffeting. To me, a mix of ISA income from a clutch of decent dividend paying shares and funds, annuity income, cash savings and inflation-linked National Savings certificates seems an attractive route for diversifying away some of this risk.
Your thoughts? Feel free to share them in the box below.
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