Advisers are split over the role that life expectancy should play in financial planning as a new study shows that clients will often make poor financial decisions based on when they think they might die.
Research published by the Institute for Fiscal Studies last week shows when people expect to die influences how much they save for retirement or spend when they have stopped work. The study says individuals in their late 70s and 80s overestimate their chances of surviving to ages 90, 95 and above, on average.
People who overestimate their survival chances at an older age may show an undue reluctance to spend their remaining wealth near the end of life. And for those who underestimate their chances of surviving through their 50s, 60s and 70s, they may save less during working life and spend more in the earlier years of retirement than is appropriate given their actual survival chances.
Can you ignore longevity?
Advisers appear divided into two schools of thought on the longevity problem. The first is longevity is so unpredictable that it cannot be used by advisers to help clients plan for retirement. The second is it is essential to making the most out of a pension.
One adviser with nearly 30 years of experience who wishes to remain anonymous notes that life expectancy statistics only give advisers an average which will inevitably be too short for some people and too long for others. Advisers cannot know how long clients will live for, so cannot make plans on that basis.
If all advisers rely solely on life expectancy figures, it would mean half of clients would actually be given “compliant” advice but be left short of money, the adviser adds.
It also clear some clients just do not have enough money regardless of expectancy and will have to simply spend what they need to survive and make it last for as long as possible.
Why expectations matter
Cervello Financial Planning director Chris Daems accepts that humans are not great at predicting their own life expectancy as people’s own biases get in the way. But he says: “There’s genuine value in framing the conversation around mortality with some proper statistics and this is why I find the Office for National Statistics tool ‘How long does my pension need to last’ particularly powerful.
“While there are obviously no certainties, having an idea of what the average is opens up the discussion with our clients in interesting ways.”
Intelligent Pensions technical director Fiona Tait says there is no way around longevity, because it is fundamental to retirement outcomes, especially pensions.
This is because timescale is crucial to any investment and in a pension it is the longevity which largely determines the timescale.
Finding a middle ground
While both camps are committed to their points of view is there a viable position between them?
Royal London director of policy Steve Webb says greater longevity overall means advisers musthelp clients manage money over several decades, a sea change from a generation ago.
Since the pension freedoms, far fewer people are buying annuities and the decline of defined benefit provision means helping individuals manage uncertainty about longevity is going to be increasingly important, he adds.
Yet Webb points out averages only get you so far and says: “A local adviser in a particular area will be able to advise in the light of local life expectancy rates, but even these are only averages, and there’s a big divergence around them.
“The key point is ‘most of us’ won’t have the ‘average’ experience. So an adviser has to think about the ‘what if’ question: what if your client is one of the 10 per cent who lives beyond 95 or whatever? It’s no good planning only for the average outcome.”
Fitzroy Wealth Management director Alan Wardrop says longevity is a good catalyst for a discussion on health, lifestyle and family history.
This helps meet the needs of some clients in his firm who have poor life expectancy and where cashflow modelling makes no sense if health and lifestyle are not included in the discussion with clients.
He says: “For example a client might retire at 60 and drawdown the level of income expected from the state pension, £8,000 a year, until the state pension kicks in when they reach 67.
“The vast majority of discussions we have with clients are not about when the money runs out but what can be passed on to children. It is important to remember that real statistics are different from conversations with real people about retirement.”
It is clear longevity is a more important topic of discussion for some advisers than others when talking to clients about retirement needs. Disagreement also remains over the extent to which longevity statistics should be relied on by advisers and the consequences for clients if the figures are wrong.
While no one can know with certainty what the life expectancy lottery will deliver, advisers are still well placed to navigate whatever challenges later life throws up.