Will you live for as long as the Queen?

A women retiring at age 65 today could spend longer in retirement than she did in employment – how will this impact financial planning?

May 30, 2012

by Maike Currie

On 21 April this year, the Queen celebrated her 86th birthday. And while this weekend's diamond jubilee marks her 60th year on the throne, it doesn't look like Her Majesty will be slowing down any time soon - after all the Queen mother lived until the ripe old age of 101. But longevity is not only confined to royal genes - the average UK life expectancy at birth for a woman is now 82. Women are living longer and, although male life expectancy is catching up, the prospect of a longer life has huge implications for women's financial planning.

Working for longer

The Queen's Speech this year outlined plans to link the state pension age to longevity, after increasing it to 67 by 2028. But PriceWaterhouseCoopers (PwC) projects that the state pension age will have to rise again to 68 soon afterwards - by 2031 - affecting those aged 48 or younger now. People in their late 30s today can expect to wait until they're 70 to receive their state pension while their children will be working into their mid 80s.

The research by PwC highlights that while women born today will be working for longer, increased life expectancies mean the period of retirement after state pension age will be similar - around 20 years on average. Women who want to continue to retire in their 60s could spend longer in retirement than they did in employment - so their assets and retirement income need to last for longer. This means there is a much greater need for individuals to engage with their retirement planning and to manage their retirement savings in response to changing circumstances and their changing needs.

This might even signal a fundamental shift in how we invest. Retirees typically shift more of their assets into fixed income to de-risk their investment portfolio and preserve income. But the problem with bonds is that they typically only pay a fixed, level income - and over a long retirement even moderate inflation will destroy the purchasing power of that income. There are also those who argue that longer life expectancy means retirees can afford to take more investment risk and perhaps need to allocate more to equities to ensure their income in retirement stays abreast of inflation.

Year of birth	Age in 2012	PwC projections for state pension age	Life expectancy at state pension age
1964	48	68	88
1970	42	69	89
1974	38	70	90
1999	13	75	95
2012	0	77	97
2050	-	84	104

Notes: Table shows life expectancy for women and men living in the UK.

Pension issues

A study by Prudential's Class of 2012 shows that women are more than twice as likely as men to have no pension - 20 per cent of women retiring in 2012 will depend on the state pension, compared with just 8 per cent of men. However, over the next five years women born after 1952 will have to wait longer to get their state pension - the wait has increased from a few months to over two years for those reaching retirement between 2016 and 2018.

Even if a woman does regularly contribute to a workplace pension, it is likely that at some stage in her life she will take a career break to start a family which will inevitably affect how much she saves into her pension plan. Women also, on average, still earn less than men. All these factors mean that women generally have smaller pension pots than men.

Even if a woman had the same size pension pot as a man, the income from her annuity contract will be lower, as women are expected to live for longer - according to Dave Grimshaw, head of longevity at Barnett Waddingham, the difference between a male and female annuity is currently around 6 per cent.

This should soon change. The EU gender directive, which seeks to bring an end to sex discrimination in insurance pricing, comes into force on 21 December 2012. After this date, it will be illegal to offer differential annuity rates based on gender. Unisex rates should produce a better deal for women and a worse deal for men, says Mr Grimshaw. But he adds that fewer men may decide to purchase annuities (opting for drawdown, say, instead) which could result in the unisex rates becoming closer to current female rates.

Anna Sofat of Addidi Wealth adds: "The biggest influence on annuity rates are gilt yields and these have fallen sharply over the past year and, although they have increased slightly over the past two months, we could still see falls in annuity rates." So if a woman is considering deferring an annuity purchase to get a unisex rate, she could find herself worse off post-December if annuity rates fall further.

Dr. Ros Altmann, Saga's director-general, adds that in general women's pension funds are still too small to provide decent pension income. "The impact of rising life expectancy will still mean that annuity income will remain under pressure - particularly as most people buy level annuities so they have no inflation protection. Therefore, the longer their retirement, the more inflation erodes the purchasing power of their annuity income," she says.

It is also common for married men to buy single life annuities at retirement because of their higher initial income rates, leaving their non-working spouse with nothing when they die. According to Hargreaves Lansdown, nearly two out of three annuities are set up on a single-life basis. "While the EU directive could also make annuities cheaper for women, many rely on annuities bought by their husbands, which could go up in price, leaving women worse off," comments Punter Southall actuary and senior consultant Catherine Love Soper.

Note though that the new rules are not retrospective so they won't affect you if you have already bought a pension.

Other factors to consider

When it comes to financial planning for women there are issues that go beyond longevity changes. In particular, increasing numbers of women are now single and/or divorced in later life, so they cannot rely on a partner for a pension. It is therefore increasingly important for women to have savings and financial plans in their own right.

It is especially important to look at how the pension fund will be split - this can be the most valuable asset after the matrimonial home for divorcing parties. With the value of pensions already hit in recent years by the global downturn, few women consider the effect a divorce could have on their already depleted pension pot. It you are raising children and managing the home it is unlikely your existing pension benefits will be vast and, given the issue of rising life expectancy, it is even more crucial to claim what is yours.

To ensure some financial independence in retirement remember that non-working spouses can contribute up to £3,600 gross per year (£2,880 net of basic rate tax) into a private pension arrangement, and still receive tax relief at 20 per cent.

Away from pensions, it is worth sitting down with an independent financial planner (find one here) to decide what to do with any lump sum cash settlements, or investment portfolios that are split - meaning some of the underlying holdings may simply not be appropriate.

For the discerning investor, rising life expectancy can offer attractive long-term investment opportunities.

"Population ageing is one of the most important demographic trends in many Western countries and the developed world more generally. This is clearly having some negative economic results in terms of reduced working age populations and increased financial burdens for national governments. However, the increasing numbers of older people, the so-called 'silver economy', also offers some clear opportunities for investors," says Tom Stevenson, investment director at Fidelity International.

Some of the specific sectors likely to benefit from the trend of population ageing include:

• Healthcare:

Although people are living longer than in the past, the functionality of the human body inevitably declines over time, thereby increasing demand for healthcare services. As more and more people move into older age brackets, both in the UK and other developed countries, it is likely that total expenditure (both private and public) on healthcare will continue rising, which will be beneficial for product manufacturers and providers of healthcare services and facilities. The ageing process will naturally be most beneficial for those companies that are more targeted towards diseases that are more prevalent in older age groups.

• Financial Services

As people become older their interest in and demand for both pre-retirement and retirement-related products and services tends to increase. Generally, this bodes well for asset managers, financial advisory firms and insurance firms that have a strong presence in the retirement and pre-retirement markets.

• Other sectors

Aside from healthcare and financials, the sectors that are likely to gain from population ageing are more diffuse and less easily grouped into a single broad category. For example, more people living into old age will clearly be positive for firms that specialise in providing care services and assisted living facilities for the elderly. Also, the retirees of the future will be more active and used to travelling for leisure, thereby creating opportunities within the travel industry. The cruise liner market, which already has a successful record of targeting older age groups, could build further on this in the future.