Can you afford to live to age 100? How to make your pension last longer

The number of people living to age 100 has hit record levels and while it may be nice to look forward to a message from the King, it could put extra pressure on your retirement income.

New figures from the Office for National Statistics (ONS) shows that while average life expectancy has actually dropped, the estimated population of people in England and Wales age 90 and above grew 2.1% annually during 2022 to its highest ever total of 550,835.

The ONS data shows average life expectancy has fallen overall since the pandemic from 79.3 years for men to 78.6 and from age 83 to 82.6 for women.

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However, the number of centenarians has also more than doubled since 2002, with an estimated 15,120.

There were an estimated 2,730 male and 12,390 female centenarians in mid-2022, up 5% and 3.5% annually respectively, according to the ONS.

It means the “100-year life” is no longer a fantasy, says Aegon’s pensions director Steven Cameron, and while living longer is a cause for celebration, it also raises the question of how to know if and when you are ready to retire.

"Are we truly equipped, both financially and mentally, to navigate a much longer life than expected by previous generations?," says Cameron.

"As we head towards a general election, will whichever party forms the next government play its part in offering support, clarity and fairness in the age of increasing longevity?"

The 100-year life

Life expectancy at age 65 years is currently 18.3 years for men and 20.8 years for women.

That may be factored into retirement plans and how you access your pension pot, but the considerations may be different if you actually have another three decades ahead of you.

Aegon says people need to consider work, wealth, family, health and wellbeing.

It may be worth delaying your retirement and working longer to earn extra money and stay invested in your pension so you have more to access later for your golden years.

You could also delay taking your state pension to boost the income at a later date.

How to make your pension last until age 100

Tom Selby, director of public policy at AJ Bell, says the "surest way" to make your pension last a lifetime is to buy an inflation-protected annuity – which provides a guaranteed income for life.

“If you’re going to go down this route, shopping around for the best rate – and making sure your provider knows of any health conditions which might impact on your life expectancy – is essential,” he says.

However, once you purchase an annuity, your pension savings are committed to this product and you can’t change your mind.

“Many people, particularly younger retirees, prefer to keep their money invested through drawdown, providing more flexibility and the potential to enjoy long-term investment growth,” adds Selby.

“Those choosing drawdown need to engage with their fund and ensure, among other things, they withdraw their money sustainably.”

If someone wants to retire today on an average UK salary of around £35,000, they might expect around £10,600 of that to come from their state pension, based on the flat-rate amount in 2023/24. This would mean their private pension needs to deliver an income of £24,400 per year, according to AJ Bell calculations.

If you assume 4% annual investment growth in a pension and ignore taking tax-free cash, a 66-year-old could need a pension fund of around £625,000 to be able to withdraw £24,400 a year, inflation-linked at 2%, and still see their pension last until age 100, says Selby.

To save £625,000, a 25-year-old would need to put away around £4,200 a year in total inclusive of tax relief and any employer contributions, or £350 a month, added Selby.

This assumes contributions increase by 2% each year and investment returns after charges are 4% per year.

However, if they delay retirement five years to age 70, the size of pension fund needed to reach age 100 could reduce to around £575,000.

Digital wealth manager Moneyfarm estimates the average person will need a retirement pot of £650,000 - in addition to their state pension and taking into consideration 1.5% growth after inflation - if they are to live comfortably on £30,000 a year from the age of 66 through to 100.

“From a financial perspective it is now almost prudent to assume you will reach 100, but in order to accommodate this, the old financial playbook possibly needs rewriting for a new era,” says Chris Rudden, head of investment consultants at Moneyfarm.

“Getting the risk levels right by not necessarily following the old norms that dictate people should be in low risk investments as they approach retirement, because their money needs protecting, is key.

“People are living better for longer and have big goals and ambitions far beyond retirement, so make sure your money continues to grow at a rate to match them. Slowing down is not the answer so don’t forget about ‘future you’.”

Rudden suggests taking an active interest in your pensions and savings to ensure you keep topping them up even after retirement and that they are at the right risk level for you.

“Most policies within the pension business have assumptions automatically baked into them which may not be conducive if you are to live to 100,” he says.

“For instance, many plans default to a de-risking strategy once you approach 65 years old, but times have changed and that is potentially too early if you need your money to continue to grow for another 30-plus years.

“But life doesn’t end at 65, in some ways it’s just beginning. So you shouldn’t just cash it all into low risk bonds at 65 and then let it sit there festering for the next 35 years.”

There may be extra care and health costs to consider if you are living longer, which could eat into any inheritance you planned to leave behind.

This is why many financial advisers will recommend spending and enjoying your hard-earned pension savings before you get too old.

“We often encourage our clients to consider spending more in the early years of retirement while they have health and time on their side,” says Ross Lacey, director at Fairview Financial Planning.

“Although they may still be alive in their 80s and 90s; the ability and appetite to do things is inevitably less. We all get too old to enjoy ourselves at some point.”