The Pensions Minister, Steve Webb, has said that retirees could be given guidance on how long they may live. He warned that people often underestimate their lifespan and may be left without sufficient savings.
The estimates of life expectancy will be based on gender, residential area and smoking habits.
Mr Webb stated that we do not have a lot to go on and might have to consider the life terms of our grandparents, however people are living a lot longer since that generation.
The minister stated that people will be provided with a life expectancy estimate as part of the plans which were outlined in the Budget for pensioners to obtain face to face consultations with advisors. These consultations would be paid for by pension schemes and the discussions regarding life expectancy would have to be handled in a sensitive manner.
A senior consultant at Towers Watson, David Robbins, has issued a note of caution about Steve Webb’s comments. He feels that the government should be aware about the uncertainty of calculating life expectancy. He said that the calculation is only one part of the overall story. The expectation may prove to be wrong and is only being calculated as an average.
An example of this is that according to the Office for National Statistics’ assumption, males who are 65 years old today will live to 86.5 on average, however 22% of them will live to 95. Mr Robbins stated that if all males were to budget for a life expectancy of 87, a huge number of them will run out of money.
Estimates of life expectancy are already used in the determination of annuity rates. Mr Webb argued that new freedoms which have been unveiled in the Budget will make this type of information more important.
The chancellor announced last month that he would eliminate rules which force many people to use their pensions to purchase an annuity which offers a guaranteed annual income. The new rules due to be implemented will allow people to make their own decisions regarding their pensions. This action has been criticised by many who feel that it may leave some people struggling in later years due to them making bad decisions.
The changes regarding pensions are due to be effective from April 2015, but this is still open to consultation.
Although Labour has supported the elimination of annuity requirements, the Shadow work and Pensions Secretary, Rachel Reeves, has asked government to provide more detail about what it would mean when put into practice.
Labour wants consideration of how the move will help lower and middle income taxpayers and if people would like to purchase an annuity under the system as it currently stands, what provision has been made for them to obtain advice.
The Office for National Statistics has issued figures which indicate that life expectancy levels are on the increase. It shows that females born today may live one year longer than those born four years ago.
The gap is narrowing faster for males. Males born today are expected to live 17 months longer than those who were born in 2010.
The government recently had success in pushing the Pensions Bill through Parliament. This bill will increase the state pension age to 67 and is due to happen between 2026 and 2028. This is eight years earlier than it was originally planned.
The legislation will also allow for a single-tier state pension to be introduced from 2016.
Image Credit: Pedro Ribeiro Simões