Healthy-life expectancy has fallen by two years over the past decade to just under 61, below the state pension age, according to analysis of ONS data by The Health Foundation, raising questions about how retirees will fund the gap between stopping work and receiving state support.
Nine out of 10 areas of the UK have a healthy-life expectancy below state pension age but the disparity between richer and poorer areas is stark.
In the most deprived areas, healthy life expectancy stands at 49.8 years for men and 48.2 for women, compared with 69.2 and 68.5 respectively in the least deprived. At the same time, the state pension age is scheduled to rise to 67 by 2028 and 68 by 2046.
Sarah Coles, head of personal finance at AJ Bell, said: “There are no guarantees any of us will make it to state pension age in robust health and in nine out of 10 areas of the UK, the average person doesn’t.”
This creates a problem for retirement planning: if someone stops working before they reach state pension age, they need to fund that period themselves.
Private pensions can be accessed from age 55, rising to 57, which means they are often the first line of defence. However, building a pot large enough to support higher withdrawals in the early years of retirement requires long-term planning and the right investment approach.
Camilla Esmund, senior manager at interactive investor, said: “Pension investing is not a single decision, especially as we move through different stages of life.”
If savers are likely to rely on their own pensions earlier than expected, how they invest before retirement directly affects how much flexibility they have when drawing an income.
The approach to pensions typically involves two phases. During accumulation, investors tend to favour global equity index funds to maximise growth over long time horizons.
As retirement approaches and portfolios move into drawdown, the focus shifts towards income generation and capital preservation to support withdrawals while limiting downside risk.
The shift in objectives also changes how portfolios are built. Moving from growth to income and preservation requires a broader mix of assets, with Kyle Caldwell, funds and investment education editor at interactive investor, stressing that one of the “golden rules that can greatly increase the chances of investment success” is diversification.
However, even a well-constructed portfolio does not remove the need for decisions at retirement itself – particularly when it comes to turning savings into income. Here is where costly mistakes can happen.
Savers must decide how to convert their pension pot into a reliable income stream. While drawdown offers flexibility, some choose to secure certainty through an annuity – making the terms they lock in critical to long-term outcomes.
With annuities, the stakes are high because the decision is irreversible. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Once bought an annuity can’t be unwound, so if you don’t shop around, you risk missing out on thousands of pounds over the course of your retirement. It’s very much a case of acting in haste and repenting at leisure.”
Differences between providers can be significant. Analysis by Hargreaves of annuity quotes for a 65-year-old with a £100,000 pension buying a single life, level annuity with a five-year guarantee shows a £647 gap between the highest and lowest annual income on offer. Over a 20-year retirement, this amounts to almost £13,000.
Beyond provider choice, retirees face several structural decisions. A single life annuity offers a higher income but typically stops on death, which can leave a partner exposed. A joint life annuity reduces initial income but continues payments to a surviving spouse.
There is also a trade-off between level and escalating income. A level annuity currently offers up to £7,832 per year on a £100,000 pot under the same assumptions, compared with £5,945 for one increasing at 3% annually. The higher starting income can be attractive, but inflation erodes its real value over time, while escalating annuities may take more than a decade to catch up.
Health disclosures can also materially affect outcomes. Providing full details may qualify applicants for enhanced annuities, which offer higher income based on reduced life expectancy.
Morrissey added that retirees are not forced into a single decision: “You don’t have to put all your eggs in one basket and annuitise all your pension at once.”
Retirement planning must accommodate uncertainty – both in markets and in personal circumstances. Declining healthy-life expectancy adds another layer of risk, particularly for those who may need to stop working earlier than expected.
Coles said: “The earlier you start planning for this, the longer you have to fill any potential holes in your plans.”
For those still in work, this can mean increasing pension contributions or considering protection products that provide income if illness prevents continued employment. Income protection insurance, while costly, can offer a buffer during working years.
Closer to retirement, planning might involve building additional savings, using other assets to generate income or considering downsizing to bridge the gap before the state pension begins.