Higher life expectancy means employees are not saving enough for retirement


Employees are not saving enough for retirement because they are pessimistic about their life expectancy, according to research by the Institute for Fiscal Studies (IFS).

Its study, Subjective expectations of survival and economic behaviour, which is based on analysis of data from the English Longitudinal Study on Ageing, found that employees in their 50s and 60s underestimate their chances of living to 75-years-old by around 20% and to 85-years-old by around 5% to 10%.

The report, which investigated individuals’ predictions about their own life expectancy, highlighted that employees’ need to take personal responsibility for, and control over, saving for their retirement.

It found that pessimism about survival is the potential driver behind employees saving less during their working life and spending more in the earlier years of retirement. It also suggested that this is a key factor in the unpopularity of annuities, with 65% of respondents aged in their 60s finding annuities priced according to average survival chances a poor deal.

Annuity demand, which guarantees employees a fixed income until death, is estimated to have fallen by 75% between 2012 and 2016. According to the report, survival pessimism may have been a contributing factor.

The report also found that deferral of the state pension is rarely taken up, with just 4% of respondents who are eligible for the state pension having deferred take-up.

In addition, the report found that if employees survive into their 90s, they may not only have relatively low levels of wealth, but may then be reluctant to spend this, which will have a negative impact on their standard of living.

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David Sturrock, a research economist at IFS and 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.

“When people underestimate their chances of surviving through their 50s, 60s and 70s they may save less during working life, and spend more in the earlier years of retirement, than is appropriate given their actual survival chances. In contrast, people who underestimate their survival chances at the oldest ages may show an undue reluctance to spend their remaining wealth near the end of life. By misjudging their longevity, individuals risk having a lower standard of living in retirement than would otherwise be possible.”