Britons risk being left with insufficient financial resources in retirement as they generally expect to die much earlier than they actually do, a think-tank has found.
People approaching retirement tend to be pessimistic about their chances of survival to older age, and then are more likely to spend their money faster once retired or even to save less in first place.
Research by the Institute for Fiscal Studies has found that both men and women in their 50s underestimate their chances of survival to the age of 75 by around 20 per cent and to 85 by around 10 per cent.
Life expectancy: Britons approaching retirement underestimate how long they will live
However, as people reach their 70s and 80s, they become more optimistic about their chances of survival to over 90 years of age and even more so once they hit 90 or more years of age.
The IFS, which compared actual and projected survival rates, said these data mattered for a whole range of economic choices, especially in light of pension freedom reforms, which have given people greater autonomy about what they do with their retirement funds.
‘For example, the lower an individual believes their chances of living to older ages to be, the less worthwhile they may think it is to save for their retirement and the faster they may choose to spend their savings once retired,’ the report says.
‘If their true chances of survival to older ages are in fact higher than they believe, then they may face a higher-than-optimal chance of being left with insufficient financial resources to maintain their desired standard of living.’
The IFS also said that the fact that people underestimated how long they would live was a potential driver for the unpopularity of financial products like annuities, which give retirees an income for life, as they feel they’re not getting a good deal.
‘Around 65 per cent of individuals could perceive an annuity priced according to average survival chances as offering an unfairly low income,’ the report said.
Women generally tend to be more pessimistic than men about how long they expect to live
Overall, both men and women present similar patterns, but women generally tend to be more pessimistic than men about how long they expect to live.
The level of misjudgment, as well as actual survival probabilities, also varies according to the level of education, wealth and marital status.
Women with lower levels of education are more pessimistic on average than those with higher levels of education, underestimating how long they will live by about 20 per cent. That’s almost double the 11 per cent misjudgement of educated women.
But it is widowed men and women aged 60 to show the greatest ‘survival pessimism’, underestimating their probability of survival to age 80 or above by almost 30 percentage points on average.
Unsurprisingly, actual survival probabilities differ significantly according to individuals’ education, wealth and marital status.
Women aged 60 in the bottom household wealth category had a 65 per cent chance of surviving to age 80, compared with 87 per cent for those in the top category, the IFS said.
IFS research economist David Sturrock, an author of the report, said: ‘As individuals are given more responsibility for saving for their retirement, and more freedom over how they use those savings in their later years, it is a particular concern that many are systematically misjudging their longevity.’
Tom Selby, senior analyst at AJ Bell, said: ‘The combination of underestimating life expectancy, overestimating investment returns and overspending could create a perfect storm for future retirees.
‘Automatic enrolment should help ensure people don’t massively undersave for retirement.’
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