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Survival underestimation may impact annuity uptake

Survival underestimation may impact annuity uptake

Category: Annuities
Author: Lieke Braadbaart
Date: 16/04/2018

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

New research from the Institute for Fiscal Studies (IFS) has found that people in their 50s are underestimating their chances of surviving to the age of 75+. With the increased flexibility offered by the pension freedoms, this means that people could find themselves lacking funds in later life.

The survey looked at people's own estimations of survival and compared these to official average life expectancies. Results show that people in their 50s underestimated their chances of survival to age 75 by around 20 percentage points, and their chances of surviving until age 85 by around 10 percentage points.

As the pension freedoms mean that you can access your pension funds from the age of 55, with a whole host of options at your disposal, underestimating how long you will need your retirement income can have severe consequences. Indeed, it may cause some people to shun annuities – which give you a guaranteed income for life – because they think the income they are offered is too low for the time they still expect to be alive.

The IFS' findings reveal that 64% overestimate the 'fair' rate they think they should get with an annuity, when compared to the objective rate. This might go some way towards explaining the drop in the popularity of annuities seen since the pension freedoms were introduced in 2015.

In contrast to the pessimistic 50-odd year-olds, individuals in their late 70s and 80s may be too optimistic, as they tend to overestimate their chances of making it to the ages of 90, 95 and beyond. Furthermore, this optimism becomes greater with age, as people overestimate living to 95 by 10-15 percentage points.

Yet by this point, retirement income will be pretty much set, so the optimism of retirees shouldn't affect any important decisions. It's those who are approaching retirement who really need to watch out, and try to take an objective look at their own situation.

What next?

An annuity won't be for everyone, but it might just be for you, so why not contact some experts to find out more?

To read up on retirement, pensions and the pension freedoms, have a look at our guides

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