With longevity back in the news again, Stephen Lowe says the strength of professional advice is it looks beyond mere averages in order to treat people as individuals – but where does that leave mass-market retirees?
Humans’ fascination with our own mortality means life expectancy research often makes it into the news. There seems to be a perpetual see-sawing between scientific advances that are set to deliver longer lives and extravagant lifestyles that are cutting them short.
Averages carried in the news pages are interesting from a wider policy point of view although meaningless at an individual level. Typically they are ‘period’ figures that look backwards and assume no future gains rather than ‘cohort’ figures that assume the improving trend of the last century still has some legs. They need careful handling – as Jeremy Corbyn discovered when suggesting life expectancy had begun falling rather than the rate of improvement was slowing down.
It is important to pick your average carefully. Official figures suggest that a 65-year-old man today will on average live to age 86.6, has more than a 50% chance of living beyond 88 and his most likely age of death is 90. A woman of 65 will on average live to age 88.8, has a whisker short of a 50% chance of living beyond 90 and her most likely age at death is 93.
A drawback for financial planning purposes is that official averages are drawn from the entire population. Yet we know huge inequality exists – as shown in the recent report by John Cridland, which contained ‘tube maps’ showing life expectancy in the wealthy area of Sloane Square on the District Line at 90.9 while further along in poorer Dagenham East it is 77.9.
Wealth is a strong predictor of a longer life expectancy. Financial advisers are well aware the ‘average’ client who needs their expertise is likely to have more capital and income than the average person in the UK, so is likely to live much longer than the official figures suggest.
This is borne out by pension industry figures that show people who have defined benefit income are likely to live longer than the general population, although there is huge variation among schemes and current speculation about how much slowing gains might reduce scheme funding costs.
While individuals tend to underestimate average life expectancy, the problem is that even those knowledgeable few who do get the figure spot-on are still no better off in terms of knowing the date of their own demise.
There is a wide range of possible outcomes from being run over by the proverbial bus tomorrow to opening the telegram from the Queen. Life expectancy gets longer with every day you live so, for those who do make it to 80, there is a better than evens chance of reaching 90.
Not so long ago this did not matter too much when planning retirement – at least in terms of drawing down a sustainable income from a pension. Some people had professional advice to help plot a sensible course aided by regular reviews to ensure they did not accidentally run out. Most bought insurance in the form of a guaranteed income knowing it would pay out however long they lived.
Pension ‘freedom’ may have changed the game but it has not solved the fundamental problem of ensuring a retiree does not consume too slowly and live a poorer life or too quickly and run out of funds.
On top of this is an increasing recognition of the problems caused by cognitive and physical decline in later life – are people going to be willing and able to make complex financial decisions into their eighties, nineties and beyond? It is important to take account of health as well as wealth with ongoing reviews at the centre of a modern financial planning process.
The strength of professional advice is that it looks beyond averages in order to treat people as individuals, focusing on their own particular circumstances and objectives.
But where does that leave mass-market retirees who, in many cases, have more to lose? Our view is that there is a strong argument for ‘auto-enrolling’ people into guidance that explores the issues of longevity and other risks, plus the introduction of intelligent defaults and rules of thumb that can help nudge people towards the optimum outcomes.
Stephen Lowe is group communications director at Just