People's expectations of how long they will survive can make annuities seem like they are a bad deal, the Institute for Fiscal Studies (IFS) has said.
The research institute found people from a range of ages underestimates their chances of survival to ages 75, 80 and 85. More specifically, the IFS said, those in their 50s underestimate their chances of survival to age 75 by around 20 percentage points and to 85 by almost 10 percentage points.
In contrast, older retirees - those in their late 70s and 80s - are, on average, "mildly optimistic" about surviving to ages 90, 95 and above. However, the IFS said survival pessimism is a "potential driver" of the unpopularity of annuities and, based on people's expectations of survival, it calculated around two-thirds (65%) of people could see an annuity as offering an unfairly low income.
It concluded: "The analysis suggests the overwhelming majority of individuals in this situation are likely to view the annuities on offer - even those that are close to being actuarially fairly priced - as a bad deal. Consequently, many may choose not to purchase annuities."
AJ Bell senior analyst Tom Selby said: "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.
"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."
He added: "There is no clear evidence savers are squandering their hard-earned pension pots in the wake of the pension freedoms. The combination of underestimating life expectancy, overestimating investment returns and overspending could create a perfect storm for future retirees."
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