As more and more people live to be 100, here’s how to ensure YOUR pension can fund a 35-year retirement

The prospect of a ‘100-year life’ is becoming increasingly likely, thanks to medical advances and improvements in our living standards.

As people live longer, the number of years they spend in retirement will also increase.

For today’s workers, a 35-year retirement is an increasingly possible possibility. But can they afford it?

According to figures from the ONS, the number of over-65s is expected to grow by 40 percent between 2023 and 2050, while the number of over-80s will increase by 90 percent.

The state pension age will rise to 67 years between 2026 and 2028 and to 68 years between 2042 and 2044.

But that would still require 32 years of pension payments, compared to the current average pension duration of just over 20 years for women and just over 18 years for men.

This does not yet take into account those who live to be over 100 years old; the number of centenarians is expected to increase by 200 percent over the next thirty years.

Worryingly, however, data from pension company Canada Life shows that three-quarters of people would be concerned about the quality of their lives if they lived to be a hundred years old. Only 49 percent have discussed their intentions regarding care or inheritance.

More than a third say they are afraid they will run out of money after retirement.

Annabelle Williams, spokesperson for pension consolidation service Pensionbee, said: ‘Previously, only a small minority could expect to live to be 100, so financially planning for such a long life was rarely a consideration.

‘However, someone in their 20s, 30s or 40s today has a much greater chance of living to a hundred years, and while longer life is a blessing, this trend will pose a significant challenge to retirement planning.

‘Someone who is 30 today and plans to retire at 60 may have 40 years ahead of them, which means they will need a much larger pension pot to live on for the entire retirement period.’

How big should my pension be?

How much you need to save for such a long pension largely depends on your expected costs during this period.

The Pensions and Lifetime Savings Association has set three benchmark figures for what it calls a ‘minimum’ pension – enough to live on, but not much left for luxuries – at £14,400 for a single person.

That rises to £31,300 per year for a ‘moderate’ pension, and £43,100 per year for a ‘comfortable’ pension.

For couples these figures are lower than the equivalent of two singles, with a minimum living standard requiring £22,400, a moderate pension £43,100 and £59,000 to fund a comfortable retirement.

With a state pension of £11,500 per year, this means a pensioner would need another £20,000 each year to fund a modest pension.

According to investment platform Nucleus Financial, a £20,000 annuity, bought at age 65 and rising by three per cent every year, would cost around £380,000.

Meanwhile, a pension pot large enough to receive £20,000 a year for 35 years would need to be £700,000. To meet the £43,100 for a comfortable pension over 35 years, a pension pot of £1.1 million would be needed.

Building such a pot is no easy feat. The average pension pot of someone in their 60s is £228,200 for men and £152,600 for women – far less than what is needed to fund a 100-year life according to PLSA figures.

It’s also worth noting that these figures don’t take into account income tax, which is currently levied on 75 percent of your pot, with the first quarter available tax-free.

In addition, pensions are taxed in the same way as normal income, with 20 per cent paid between £12,571 and £50,270.

Above €50,270 the higher rate of 40 percent applies, while above €125,140 45 percent is charged.

How can I increase my pension pot?

As a general rule of thumb, pension savers are advised to save one year’s salary at age 30, three times their salary at age 40, six times their salary at age 50 and eight times their salary at age 60. The aim is to reach ten times your salary at retirement age.

Alternatively, savers can aim to contribute half a percent of their income for each year of their lives. At the age of twenty this would be 10 percent, rising to 15 percent at the age of thirty.

However, Pensionbee’s Williams says: ‘Conventional wisdom is being challenged by increasing longevity and the many competing income demands that younger people in particular face.

‘For example, buying a house is much more difficult, making owning your own home in retirement less likely. Rents are more expensive, childcare is more expensive and many under-30s will also be paying back their student loans.

‘This means that younger generations are likely to be in a worse financial position at retirement age than their parents and grandparents.’

As a result, it is all the more important to start saving for retirement early so that you can benefit from employer contributions, the growth of your retirement investments and the compounding effect of reinvesting.

This also means that there is considerably less benefit to saving for a one-off premium later in life. You lose the benefits of employer contributions if you reduce your own contribution, and you also lose the compound growth of your pot over a long period of time.

Making monthly contributions is therefore the best way to do this.

According to Nucleus, this could look something like this for a pot of £380,000, without taking into account tax relief and employer contributions, or increases in personal contributions:

• If you start contributing at age 25 and pay for 40 years, approximately £240 per month
• If you start at age 30, around £320 per month
• If you start at age 35, approximately £430 per month
• If you start at age 40, around £600 per month