• Average UK life expectancy is set to surge into the 90s for boys and girls born in around 20 years’ time, new Office for National Statistics projections suggest (Past and projected period and cohort life tables - Office for National Statistics (ons.gov.uk))
• Life expectancy at birth is projected to increase by 2.8 years for boys, from 87.3 to 90.1, and 2.4 years for girls, from 90.2 to 92.6, by 2045
• Around 1-in-7 boys and 1-in-5 girls born in 2020 are expected to reach their 100th birthday
• By 2045 the chances of reaching 100 are expected to rise to 1-in-5 for boys and 1-in-4 for girls
• AJ Bell analysis suggests a pension pot worth around £315,000 today could deliver a ‘moderate’ standard of living in retirement for 30 years
Tom Selby, head of retirement policy at AJ Bell, comments:
“While the Coronavirus pandemic has tragically hit average life expectancy in the last two years, over the longer-term we all need to prepare for a world where reaching your 100th birthday is increasingly commonplace.
“The chances of a new-born girl living to 100 are expected to increase from around 1-in-5 to 1-in-4 over the next two decades or so. For a boy, the likelihood of reaching their centenary is projected to rise from 1-in-7 to 1-in-5.
“The fact we are all living longer should of course be celebrated. However, it also has profound implications for both public policy and people’s own finances – particularly retirement planning.
“Rising life expectancy will mean increasing numbers of people face a stark choice: save more, retire later or spend less money - and have a lower standard of living - in retirement.
“Although there will always be a temptation to put off retirement saving, those who do so risk having to rely on the state pension. This provides only a basic level of income, however, and younger people in particular need to prepare for a world where the state provides less of their retirement income than it does today.
“For those who aspire to more than a very basic standard of living in retirement, the key is to save as much as you can as early as you can, taking advantage of matched employer contributions through automatic enrolment, the boost provided by upfront tax relief and harnessing the power of long-term investment growth.”
How big a pension might someone need to enjoy a ‘moderate’ standard of living in retirement?
How big a pension pot you will need to deliver the retirement you want will depend on a whole host of things including other income sources, your lifestyle and the returns your investments deliver.
To help guide savers who are unsure, the Pensions and Lifetime Savings Association (PLSA) has developed the ‘Retirement Living Standards’. These provide a useful benchmark to assess how much a ‘minimum’, ‘moderate’ and ‘comfortable’ retirement might cost.
You can read more details about the Retirement Living Standards here: The Detail - PLSA - Retirement Living Standards
Let’s consider a single person hoping to enjoy a ‘moderate’ standard of living in retirement today. Based on the PLSA Living Standards, this might require a post-tax income of £20,800 – implying a pre-tax income of £22,860 (based on 2021/22 tax rates).
If we assume the first £9,339 of income is provided by the state pension, that means his private pension might need to deliver the remaining £13,521.
If they have already taken their 25% tax-free cash, they might need a fund worth around £315,000 to provide that income, rising each year by 2%, for 30 years*.
If they needed to sustain a similar standard of living for 35 years, they might need a fund worth around £350,000.
*Assumes 4% annual investment growth after charges per year
