Savers to benefit from life expectancy changes

Savers to benefit from life expectancy changes

Savers buying an annuity could benefit from improved rates as increases in life expectancy are beginning to stall.

According to data released today (March 7) by the Continuous Mortality Institute, part of the Institute and Faculty of Actuaries, life expectancy at age 65 is five months lower than in the previous year for both males and females, at 19.8 years and 22.4 years, respectively.

Tom Selby, senior analyst at AJ Bell, said in the short term, this fall was good news for savers buying an annuity as the rates on offer should increase.

It could also be good news for pension scheme liabilities, he added.

He said: "If these schemes are able to factor in lower life expectancies than at the last valuation, you would expect liabilities and deficits to fall.

"This could in turn provide a cashflow boost to the business if contributions aimed at reducing deficits can be reduced."

According to calculations from consultancy firm Aon, the use of these latest figures could lead to a reduction of about 2.5 per cent in the liabilities of a typical UK pension scheme.

The CMI uses a methodology referred to as cohort life expectancy, which takes into account assumptions about future changes in mortality.

The data suggests that mortality improvements peaked some time ago with the highest improvements seen in 2004 for males and in 2006 for females.

FTAdviser reported in September that figures from the Office for National Statistics showed that life expectancy at birth stalled for the first time since modern records began.

According to Tim Gordon, chairman of the CMI Mortality Projections Committee, it is now widely accepted that mortality improvements in the general population since 2011 have been much lower than in the earlier part of this century.

He said: "Average mortality improvements between 2000 and 2011 were typically over 2 per cent per year but have since fallen to around 0.5 per cent per year.

"The causes of the slowdown, and whether these current low improvements will persist, remain a subject of considerable debate."

Mr Selby said if the life expectancy slowdown continues, it could have profound implications both for individuals and society as a whole.

He said: "If life expectancy improvements stall or even go into decline, questions about whether future increases in the state pension age should be implemented will inevitably grow louder."

State pension age has been set at 65 for men since 1925, and was equalised for women in November.

Since December, and spread over two years, the state pension age is gradually increasing for both men and women to 66.

It will increase again to 67 starting in 2028, meaning compared with today, future retirees will have to wait an extra two years for their state pension.

Steven Cameron, pensions director at Aegon, said while the life expectancy figures for males and females have fallen slightly again, they still show men aged 65 will on average live til 87 and women to 89.