Matters of life and death
For many of the 7.1m people in the 60-69 age cohort in the UK a life or death decision looms. Should they possess a large enough stock of retirement assets outside a DB pension scheme, these people will need to make an assumption about their own longevity projection and structure their income accordingly.
This is a potentially daunting task that few are equipped to conduct alone, as the UK Parliament’s work and pensions select committee has recently acknowledged.
A recent paper by the Institute of Fiscal Studies finds that many people underestimate their statistical chances of survival to specific ages. For example, those in their 50s and 60s underestimate the chance they will survive to 75 by about 20 percentage points as measured against standard mortality tables, and by 5-10 percentage points when asked to estimate their chances of living to 85.
This has important policy implications given the growth both of defined contribution pension assets overall and the number of people enrolled in workplace pensions.
The UK’s auto-enrolment programme brought 17% more into workplace pensions between 2015 and 2016 alone, and opt-out rates are low. The at-retirement problem will compound as assets and pot sizes accumulate.
If left to their own devices at retirement, significant numbers are likely to run out of assets years before they die.
The situation is compounded as retirement is unlikely to be a single event for many, but staggered over a number of years as people reduce work and draw down on assets gradually.
“If left to their own devices at retirement, significant numbers are likely to run out of assets years before they die”
The freedom and choice agenda introduced in the UK in 2015 freed 700,000 or so people turning 70 each year from the need to buy a compulsory annuity, and has been remarkably popular.
The policy works well for the small number of retirees who have accumulated significant assets through pensions system over their lifetime, and who are in a position to pay for advice, or who are unlikely to run out of assets anyway. Unfortunately many, particularly those with smaller asset pots, will get little help from the traditional savings and investment sector.
As the parliamentary work and pensions select committee report highlights, few individuals understand their at-retirement draw down options. This is why the committee has recommended default decumulation pathways by April 2019.
Another recommendation is a government-sponsored pensions dashboard that conveys personalised information simply and clearly. Empowering NEST, the default auto-enrolment provider, to provide retirement income services would be a logical step, if not ideologically in tune with the current government.
Mass market deferred annuities and properly designed reverse mortgage products might be far off but would be innovations that most people would welcome.
Liam Kennedy, Editor