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Tables are turning

In my last article, I started to look at the structure, meaning and implications of mortality tables, concentrating on the parts of those tables which indicate the remaining life expectancy of a male of a given age. I particularly stressed the importance of understanding that the tables are constructed on an historical basis and should not be taken – as is often the case – as being predictive. This point is particularly important in noting the improving life expectancy of males over the last few decades, a progression which is expected to continue for the foreseeable future.

But what about females? It is well known that females have historically lived longer than males – a phenomenon which I have long suspected has something to do with them not working as hard as us blokes – but, in all seriousness, it appears that this difference might not continue for many more decades.

Around 30 years ago, mortality tables indicated that a 60-year-old female could expect to live (remember, this is badly phrased, bearing in mind the historical nature of the tables) about six years longer than a male of the same age. Ten years later, that gap had narrowed to five years and the latest (currently unofficial and unpublished) tables I have seen indicate that this gap has continued to narrow consistently to a little over two years.

I previously noted that male life expectancy for a 60-year-old over this period has been improving by around three years every decade so it can be seen that this reduction in the life expectancy gap between the sexes cannot be attributed to worsening life expectancy of females. They have been improving by around two years every decade. If these trends continue for the next few decades, male and female life expectancy could converge and conceivably, if the trend lines really do continue, male life expectancy could exceed that of the fairer sex.

No one is sure quite what is causing this narrowing – my theory is that more women are working or at least going to work – but the financial planning implications have not been lost on life insurance and annuity providers and should not be lost on financial advisers.

Take lifetime annuities for a start. As the life expectancy gap has narrowed, so has the difference between male and female annuity rates.

Advisers on retirement income options must be aware of the impact these changes are having on joint-life annuities. Around 20 or 30 years ago, the cost to a male of including his wife in his annuity was very high as, statistically, the insurance company could foresee his wife outliving the annuitant by a significant number of years, meaning a longer payment period under the annuity. Conversely, the cost to a female of including her husband in her annuity was small as there was a strong chance that he would predecease her.

That situation has changed materially, with the cost to males of a joint-life annuity falling against the rising cost of a joint-life annuity for females. You might need a few seconds thought to prove that logic to yourself. This has an impact on the attractions or otherwise of joint-life annuities against single-life annuities and flexible retirement income options (drawdown) against conventional annuities.

So, watch for the publication of the next annuity tables and be aware of the implications of the continuing trend I understand they will confirm.

Be aware also, that it is not only a person&#39s sex which determines life expectancy. The place of birth is at least equally important, as revealed by the results of a recent survey by the National Statistics Office.

This survey of life expectancy in all the local authorities in England and Wales highlights the fact that people born in different parts of the country can expect to live for very different lengths of time. It highlights that the difference in life expectancy at birth between the local authorities with the highest and lowest figures is 10 years for males and seven years for females. The local authority with the highest life expectancy for males is North Dorset, with that for females being West Somerset. The local authority with the lowest life expectancy for both males and females is Manchester.

The report makes no suggestions about how or why these variances are so wide but, observing the issue as a Yorkshireman, I ask would anyone want to live a long time in Manchester?

These incredible variances should be understood and acted upon by financial advisers. Apart from group risk contracts, life insurance companies offer the same rates for life insurance and annuities regardless of the place of birth or current residence of the client. Could I suggest, therefore, that life insurance cover is comparatively expensive in the South-west as folk down there are not likely to claim until a ripe old age, while it could be seen to be very cheap in Manchester where a claim might be expected 10 years earlier.

Conversely, annuity rates – perhaps most important, pension annuity rates – can be seen to represent excellent value for the South-westerners but very poor value for Mancunians.

Continuing this line of logic, where conventional annuities can be shown to be relatively poor value (for example, Manchester), the attractions of alternative retirement income options are enhanced. Without any flippancy, one would expect to see a greater proportion of retirees in Manchester following the drawdown route than in the South-west.

Please do not take this comment to be a minor or contentious issue. For a male aged 60, a 10-year difference in life expectancy has the same impact on conventional annuity rates as a 4 per cent difference in underlying interest rates and, with interest rates being little more than 4 per cent at present, the issue of place of birth represents a key aspect of a retirement income recommendation.

In summary, , I would urge all financial advisers to set aside a little time and effort to become more conversant with the content, structure and messages of mortality tables and give urgent and serious consideration to the way in which this enhanced understanding should be applied to real-life financial planning situations.

In my next article, I will examine more closely the impact of mortality tables on financial planning aspects for younger clients, while also looking at other important issues relating to the imminent introduction of the statutory money-purchase illustrations.


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