On the go: Declining annuity sales are driven by individuals consistently underestimating how long they will live, according to new research form the Institute for Fiscal Studies.
Numbers of annuity buyers have fallen dramatically since the 2015 ‘pension freedoms’ reforms. Only around 12 per cent of newly accessed defined contribution pension pots are now used to buy an annuity, the study found.
Yet economic models suggest individuals should be keen to insure against the risk that they exhaust their wealth if they happen to live for a long time.
An important part of this ‘annuity puzzle’ can be explained by the fact that many of those in their 50s and 60s underestimate their true chances of surviving to age 75 by 20 percentage points, on average.
Commenting on the IFS research, Andrew Tully, technical director, Canada Life, said: “Our research shows people typically underestimate their life expectancy by around six years for women, and five years for men. On the one hand this is positive, as people are living longer than they think, but it can also have a significant impact on financial plans.”
When asked what age they expect to live to, the Canada Life research shows the average answer from over-50s was 82 years old. Men estimated a lower life expectancy than women (81.2 years compared with 83 years).
Office for National Statistics data show that 50-year-olds are currently expected to live on average until 86 if they are a man, and 89 if they are a woman. One in four men aged 50 can expect to live till age 95, while women of the same age can expect to live till age 97.
There are also stark differences in predicted life expectancy depending on where over-50s live. Londoners are expected to live the longest with an average of 83.6 years old, while the lowest, in Wales, was four years less at an average of 79.5.
