A new report has found that a dramatic fall in the number of annuities sold could cause problems for some pensioners’ incomes as their retirement goes on.
The Institute for Fiscal Studies (IFS) has warned that many people are underestimating how long they are likely to live after retirement as annuity sales plummet from 90% in 2013 to just 12% today.
The report suggests this is in contradiction to economic models suggesting that consumers should be keen to insure against the possibility of exhausting their wealth due to living longer.
Before pension freedoms consumers with defined benefit schemes – final salary pensions – bought annuities so they could fund their retirements comfortably.
Now people over 55 are withdrawing cash from their pension funds and using the cash to either fund major projects in their lives or to self-invest in different schemes.
But IFS said people are underestimating their chances of surviving to older ages. It said: “This suggests that both public policy-makers and those in the pensions and insurance industry should be mindful of the possibility that individuals who choose not to annuitise because they underestimate their longevity may be failing to buy a product which in fact offers them good value insurance of their income in older age.”
It also pointed to other reasons for the drop in annuity sales, including large one-off expenditures, passing money on to children, potentially higher rates of return in other investments or because individuals feel sufficiently funded by their state pensions.
Separate research by Canada Life reached similar conclusions on life expectancy.
Official Office for National Statistics (ONS) figures give the average age of men as 86 and 89 for a woman. But a quarter of all men aged 50 can expect to live to the age of 95 while a woman of the same age can expect to reach 97.
Hoiwever, a survey of more than 1,000 adults the average age expectancy turned out to be 82. It also highlighted differences depending on where the subject lived. Londoners expect to live to an average age of 83.6, but in Wales the average is just 79.5
Spokesman Andrew Tully said: “Our research shows people typically underestimate their life expectancy by around six years for women, and five years for men.
On the one hand this is positive as people are living longer than they think, but it can also have a significant impact on financial plans.
“When we talk about averages though it is important to remember averages are just that, and can mask significant differences in life expectancy across the UK.
People’s retirement financial plans need to be flexible enough to cope with the unexpected while also providing a level of financial security and a combination of drawdown and annuity can deliver just that.”