Growing old disgracefully: why longer life is ruining your wealth

The ageing population warnings are coming home to roost, but our finances are still years behind

Living just 3 years longer than we expect could mean a £35,000 shortfall in pension savings (Getty)

You’d be forgiven for wondering what you’d missed after news that we’re all living longer prompted a landslide of doom and gloom comments rather than celebration that improved health and healthcare are giving us more time to make the most of life.

The Office for National Statistics (ONS) reckons there are now over half a million people aged 90 or over, and more than 14,500 aged 100 or older. That’s a 65 per cent increase in a decade, with the number of particularly elderly men now beginning to gain ground on the number of elderly women. Sounds like a good news story doesn’t it?

Except that, as things stand, we’ve got no hope of funding this ever increasing lifespan – not as a state nor as individuals.

The impact of ageing populations isn’t a new story but it has, until now, seemed something that will hit home at some point in the future. But already, we have more over 60s in our society than children. And the effects of that demographic shift are starting to be felt by all of us.

How old?

On the whole, we’re pretty rubbish at guessing our own life expectancy. Research from Aviva has found that men in Britain estimate they will live for around 15 years after they stop working (at around 65) when they’ll probably live another 19 years and women think they’ll survive another 19 years when they are likely to be around for another 21 years.

It may not sound too far out, but the current upward trend isn’t showing significant signs of slowing and anyway you may be something other than average. And that is posing huge problems for our wealth as well as our health.

The biggest noise prompted by the ONS figures has been, as you might expect, from the pensions industry, not least because even the three or four extra years would demand around £35,000 in additional pensions savings to fund them.

“If this trend continues as it has over the past years, people will be looking at having to fund a 40-year period with their pension and savings,” says Gareth Shaw, head of consumer affairs at Saga Investment Services. “For younger generations, with less generous pension deals and lower levels of pension contributions, this is going to be all the more difficult.

“Today’s retirees routinely underestimate how much they need to have a decent income in retirement. [Our research] found over 50s need double the amount they think to generate the kind of income that will leave them comfortably off in their later years.

“For people approaching retirement now, it is vital that they consider how to maximise their money. With interest rates at record lows and returns on cash savings dwindling, a shift in risk appetite and a move to the stock market will be necessary for people to have an income that sustains them throughout a potentially very long retirement. With 71 per cent of ISAs held by over 45s in cash, there is clearly still some way to go.”

Give and take

But that’s far from the only challenge the demographic shift throws up, warns Steven Cameron, Pensions Director at Aegon. “While we’re all living longer, women continue to outlive men. For every 100 men aged 90 and over in 2015 there were 240 women. This can create challenges for couples planning their joint retirement finances. Our own research has found that a quarter of those aged over 75 have not made any pension provision for their spouse in the event of their death. Given that in older generations, it has typically been the man who was the main breadwinner, this can lead to an income shortfall for their surviving widows in later life.

“Longer life expectancy also masks whether or not people are in good health. As the number of people reaching very old age rises, the pressure on their finances to cover care costs can only rise. Increasingly people should budget for a retirement in which their income needs are high not only in the active early phase of retirement but also again in later life.”

There’s no doubt that the risk of running out of money is very real, not least because around a quarter of the population isn’t saving anything for old age despite the best efforts of the workplace pension. Plus recent pensions freedoms legislation now makes it easier to draw from the pot we might have managed to amass. The latest government figures show that 159,000 people took flexible payments from their pensions in Q2 2016 under the new “freedom and choice” rules – a record high.

All this only relates to private pensions, and we know the state pension is already a perilous thing. The older we live the greater the chance, under current rules, of an increased “dependency ratio” in other words more people are taking out of the state pot in retirement income than are paying in in National Insurance.

It should come as no surprise that if most of us are spending a third of our lives in retirement, something has to give and right now, the pressure remains on the state pension triple-lock which currently guarantees the state pension will rise by at least 2.5 per cent a year.

Don’t make the mistake of seeing all this as an entirely one-way street though. Some estimates suggest the net contribution to the UK economy made by the over 65s after pensions, welfare and healthcare costs is currently around £40bn. After all they’ve got plenty of time to spend.