Rethinking retirement

Ask a centenarian the secret of long life and they usually come up with amusing answers – cold baths, a daily glass of their favourite tipple, regularly eating fish and chips. The more scientific probably agree improved diets and healthcare in the modern era have had more effect, although many of the number crunchers have been caught out by the speed at which life expectancy has increased in recent years.

According to Government Actuary’s Department figures, about one in 10 of today’s 65-year-olds will go on to celebrate their 100th birthday. Rising life expectancy is driving changes to government policy regarding state pension. Increasing numbers of people are reaching state pension age and they are set to claim for longer than ever before, driving up the costs to taxpayers. Increasing the state pension age to 65 for women by 2020, and then to 68 for both sexes by 2046, will help to ease the burden. People can now defer taking the state pension in return for a higher level at a later date.

Individuals are also recognising the need to work for more years to build up sufficient assets to sustain themselves through a longer retirement. Government figures show the average age at which male workers retired fell to around 63 in the mid-90s, but had risen to 64.2 in 2006. For women, it is 61.8 years compared with below 61 for most of the 1980s.

With such huge changes sweeping through society, it seems incongruous that the government is sticking to its guns over the rule that forces virtually everyone to have bought a lifetime annuity by the age of 75, a rule in force since income drawdown became an option in 1995.

The Treasury, in its 2006 report The Annuities Market, responding to Pensions Commission proposals, drew on Association of British Insurers [ABI] research from 2002, which found that two-thirds of retirees bought their annuities at the point of retirement. It said the figures showed: ‘The upper age limit of 75 does not appear to be a constraint: just one in 20 annuitise between ages 70 and 74.’

The Pensions Commission had, in fact, made two proposals: ‘the primary focus of policy should be to encourage and facilitate later annuitisation’, and ‘the ages of first and last possible annuitisation should rise over time in line with life expectancy’. The government rejected the first, but said it would keep the second under review.

Pressure for change is only likely to grow. The rule is primarily designed to prevent people from running out of pension assets and falling back on the state pension. In the report, the government justifies the age 75 cut-off for annuity purchase with actuarial figures that show any alternative investment that could provide an expected yield greater than an annuity after this age would inevitably carry a significant degree of risk, which people in the later stages of life may be ill-equipped to bear.