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John Lawson: Getting it right on longevity

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If recent research by The Platforum is correct, this year will see advisers recommend more clients opt for income drawdown rather than annuities.

Such a wholesale shift in the recommended solution will also require an advice process that addresses all of aspects of drawdown. Aspects that people who had previously bought annuities are less familiar with.

One of these is longevity, which translates in the income drawdown advice process as “how long my money needs to last”.

Recent research we conducted shows people may underestimate their longevity by up to eight years. We asked 50-65 year olds how long they expected to live once they retired, with men saying 15 years and women saying 19.

Comparing this with insured mortality data at age 65 indicates that men may live over six years longer than they expect and women more than four years. That is without factoring in any improvement in mortality that might occur over the next 25 years.

For people in good health, the difference between expected and actual longevity is even more, at eight years for men and almost five years for women.

When considering longevity, it is therefore important to take into account the circumstances of the individual rather than use broad-brush national data.

Are they a saver? In this case, insured lives data is more appropriate. Are they in good health? If so, an appropriate adjustment should be made to reflect that, and so on.

While predicting the life of any one individual is impossible, advisers will need to demonstrate their advice processes looked at the probabilities of a long retirement versus a shorter one and the reasons why this might be true.

Non-smokers in good health at age 65, whose parents lived well into their Nineties, have a higher likelihood of living longer than average.

The most common (modal) ages of death are 89 for men and 90 for women. However, 32 per cent of men and 37 per cent of women will live longer than this, well into their mid-Nineties. With this in mind, a more cautious initial approach that expects savings to last for 30 years rather than 20 or 25 would be more appropriate for people who have a high probability of being in this third of the population.

At the other end of the scale are people who have a higher likelihood of dying younger than the average. Ensuring people who fall into this group spend enough over their shorter-than-expected life, may form an important part of their financial plan.

Life expectancy is also a moving feast. The longer we live, the longer our life expectancy. This is not just down to improvements in healthcare as we age but is also due to the statistical truth removing those who die in early retirement increases the average life expectancy of those who survive.

But this is more than just a statistical phenomenon. A man who was expecting to live to 86 years at 65 will find they now expect to live to 90 years upon reaching age 80. This continual improvement in longevity means money plans need to be adjusted to take into account the longer period over which it needs to last.

John Lawson is head of pensions policy at Aviva 

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