Soon-to-be and recent retirees significantly underestimate their longevity, expecting a lower chance of survival to old age compared to official estimates, according to the Institute for Fiscal Studies (IFS).
Savers in their 50s or 60s gave, on average, a 20 percentage point smaller chance of living to age 75 than official estimates, as calculated by the Office for National Statistics (ONS), and a five to 10 percentage point lower likelihood for living to age 85.
Meanwhile, people in their late 70s and 80s overestimate their chances of living to older ages, predicting a 10 to 15 percentage point greater likelihood of living to age 95 than official estimates.
The misjudgements could cause savers to save less in their working lives and then overspend in early retirement, the institute warned, before then underspending in later years. Overall, the errors could see pensioners enduring a lower standard of living in retirement, the report said.
IFS research economist and report author David Sturrock said the findings were particularly concerning given the pension freedoms.
"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," he said.
With the introduction of the pension freedoms three years ago, it has become more important for pension scheme members to understand how long their retirement fund can last for, especially if they adopt a cash lump sum or income drawdown product.
Sturrock raised concerns that younger pensioners, because of their pessimism, may shun annuities priced according to average survival chances as offering less than a fair deal, when in fact they do offer a fair deal for around half of individuals.
He added: "By misjudging their longevity, individuals risk having a lower standard of living in retirement than would otherwise be possible."
Women were more likely to underestimate their survival chances at age 65, predicting a 65% chance of living until age 75 when the official estimate is 89%; for men, the figures were 65% and 83% respectively.
In contrast, at age 80, men were more likely to overestimate their survival chances, offering a 32% chance of living to age 95 compared to the estimate of 17%, while women gave an answer of 37% compared to 24%.
However, the findings did also show many recognised the impact of personal circumstances on their life expectancy, with smokers reducing their survival chances by six to eight percentage points compared to non-smokers. Those whose mothers died at age 85 or older, meanwhile, predicted a five to seven percentage point higher chance of survival to an older age than those whose mothers who died age 60 to 64.
AJ Bell senior analyst Tom Selby said it was vital engagement with savers is boosted to educate them on their at-retirement options and potential risks.
"While the rapid rise in average life expectancy experienced in the UK over recent decades is to be celebrated, it also poses a serious retirement planning conundrum," he said. "If large numbers of people massively underestimate life expectancy and spend too much in retirement as a result, they risk running out of money early and potentially falling back on the state.
"The combination of underestimate life expectancy, overestimating returns, and overspending could create a perfect storm for future retirees."
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