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Life expectancy ‘useless’ for financial planning, advisers warned

Life expectancy estimates are “useless” for financial planning and advisers who use them for cashflow modelling risk their clients running out of money in retirement, Partnership chief executive Steve Groves has warned.

Speaking at the Institute of Financial Planning’s annual conference in Newport last week, Groves (pictured) said the average life expectancy for a 65-year-old male is 86.5 but 22 per cent of men aged 65 will live to see their 95th birthday.

He told delegates: “Life expectancy is pretty much useless for financial planning. All it tells you is the point at which 50 per cent of people are dead.

“So if you plan to decumulate to life expectancy and you get it perfectly right, half your clients will run out of money.”

Experts say advisers must ensure they manage the risk effectively.

UBS Wealth Management executive director Graeme Price says: “This is an important point for cashflow modelling as many financial planners will cashflow model to life expectancy. 

“There is a need to manage the risk of outliving the average life expectancy. 

“One option is to buy an annuity but there are others, too, such as holding certain assets on a yield basis.”

Pilot Financial Planning managing director Ian Thomas says advisers need to research life expectancy thoroughly, be proactive in discussing it with clients and monitor it on an ongoing basis.

He says: “I have done a lot of research on this which I keep on file for compliance reasons. It is based on Office for National Statistics data and combines average life expectancy with the likelihood of living to 100.

“I make a point of engaging clients in this to make sure they also feel it is a sensible assumption. 

“Further to that, financial planning is an ongoing process so various uncertain factors, such as spending patterns and inflation, are kept under review and life expectancy should be part of that.”

Expectancy

Expert view

Hobbs-Richard-2012 700 x 450.jpg

It is very difficult for advisers to do due diligence in this area. The trouble is that with a retrospective regulatory regime, they are damned if they do and damned if they don’t.

To ignore the Continuous Mortality Investigation data – which combines Office for National Statistics data with statistics from life companies – in their planning process would be reckless.

But average figures tell you nothing about each individual customer because you do not know where they lie on a normal frequency distribution.

There is also a growing view that the CMI data may be misleading because it does not conform to normal frequency distribution, so the mean average may give a very skewed view of the figures.

For advisers, it boils down to knowing your client. You have to ascertain the client’s appetite for risk – are they prepared to risk running out of money? Advisers should take life expectancy data into account but they must also consider their client’s health.

Richard Hobbs is an independent regulatory consultant

Adviser view

Pete-Matthew-MM-Peach-320.jpg

Pete Matthew, managing director, Jacksons Wealth Management

Most financial planners would take life expectancy averages as a starting point but also ask intelligent questions about health and family longevity. Any assumption can be pie in the sky if it is looking more than three years ahead so the key is to revisit cashflow modelling regularly.

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Comments

There are 17 comments at the moment, we would love to hear your opinion too.

  1. At least folks will have their pension to fall back on – won’t they?

  2. Just build in a margin of error

  3. Sorry, but another ‘shouting at Advisers because we don’t understand what they do’ story.

    I literally have never met a Planner, nor seen a single case where this scenario has happened. It has long been protocol to use 100 or some similar figure in plans, and to explore with the client what their personal experience may be, given family history, state of health etc. As Peter and Ian have outlined

    And, funny thing this, but some of us even understand the word ‘Mean’, and that it does not mean ‘Maximum’.

    And these people run Product Providers…..?

  4. Christopher Wicks 20th October 2014 at 10:35 am

    This is not new. Life expectancy simply indicates when 50% of the population are likely to die. When modelling Cashflow it is obviously therefore an inappropriate benchmark. We use age 99 on the basis that most people should be dead by then and we don’t want the fund to run out before they die. This will probably lead to a surplus after death but this is better than the opposite. Depending on the level of funds in question and the size of the clients estate additional planning may be needed re IHT etc. No two clients are the same so the circumstances of each needs to be thoroughly thought through.

  5. These kind of comments annoy me. They assume that advisers stupidly take life expectancy and blindly follow it without considering any other data or putting in place a contingency. I appreciate that Mr Groves needs to sell more of his poor value annuities but insulting the intelligence of the adviser community if probably not the ideal way to go about it.

  6. Now Mr Client. Gauging life expectancy is useless. You might live to 100 or you might die tomorrow, who knows. You’re just going to have to take pot luck. That’ll be £350 + VAT. you can pay the cashier on your way out.

  7. The good news is that at least there isn’t a tax of 55% on erring on the side of caution anymore.

  8. It is a good argument for annuities and Secure Lifetime Income products to be considered. We already know that life expectancy has been reported that it will increase over the next 20 years, so the figures quote in the above will only expand…

    Nice ‘tongue in cheek’ comment from Sam… but it does highlight the increasing need for Joe Public to have good professional financial advice. What a shame our industry is also increasing with age and little new blood is being tempted in to our industry. The FCA and Product providers need to consider how best to address the declining numbers, or there will simply not be an industry sufficient to meet the demands.

  9. We need parameters from the FOS as the way I see it is that you are damned if you do and damned if you don’t. Annuities, unless with escalation, are not guaranteed to be the answer, drawdown and all it’s new forms are not guaranteed to be the answer. There is risk with everything. The clients are going to have to take on board this is the fact and so does the FOS. If we give advice and things go against the advice then it would appear that we (advisers) are the easy option to sue!

  10. I have used the same comment since 1992 and I started using Prestwood software. Mr client Mr and Mrs client the government occasionally produces mortality tables which indicate projected life expectancy. This data is collected on average death rates within the UK. The insurance companies quite often write whole life plans for you to die when you reach age 120. Given the average mortality for males is circa 82 and females circa 84 May I suggest for cash-flow planning we use age 100. .in the years ahead that target age can always amend to a new target date say 120 years or longer, as your plan develops.

  11. proper mortality tables using on life expectancy based on current age attained will solve this problem with the additional use of an assumption that longevity will continue to improve.

    Using the average life expectancy tables so loved of by headline-writing journalists will always fail.

  12. Lifetime annuities – demise, exaggerated.

  13. Incompetent Regulators 20th October 2014 at 11:49 am

    I hope the FOS are listening and taking this into account before making judgments!

  14. Very often there are two people involved. At least with drawdown you are not gambling with who will die first. And the knowledge that the residual money can be passed to other beneficiaries instead of funding a stranger’s income and a life office’s profits encourages erring on the side of caution.

  15. I’ve yet to meet a client who genuinely wants to run his/her ‘pot’ down to Nil by the time they die. The reality is that we as planners will always err on the cautious side and encourage our clients to do the same.

    Whatever happened to a dose of common sense? Have the discussion with your client, document it i detail, blah. blah, blah…as it’s really all you can do in addition to regular reviews – which are the most important part of any advice type we give.

    This is why we simply do not undertake and are not interested in working with clients who do not value our ongoing reviews and the buiilding of a strong and long term relationship.

  16. I am increasingly finding these MM articles, which focus on one aspect of financial planning, or one area of product legislation, inappropriate.

    Holistic financial planning is balancing a client’s affordability with his/her need to protect, save and invest (in the pre-retirement period) then creating, managing and reviewing their in-retirement strategy. It is not a “one-size fits all” scenario. Nor is it simply utilising mortality rates in cash-flow forecasting, to acheive an end result.

    What it is is ongoing dialogue with clients, setting targets to acheive their financial goals, matching solutions to their objectives and risk profile, as these change over time and implementing strategies for the unthinkable – such as premature death, serious illness curtailing a working career, critical illness/disability (in older age as well).

    I say all of this, not for the other advisers who are here having their say on MM (obviously, because you know what it’s all about and you know what you’re doing) but rather for the writers of these, one sided articles.

  17. Whilst agree with the headline any adviser active in cash flow modelling will take life expectancy into consideration but as only one factor in discussing and designing a plan for a client.

    This does smack of ‘you can’t cash flow model a client, it’s too risky, what if they run out of money…please buy my annuities, please, please pretty please.

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