How long does your client’s money need to last?

24 January 2019

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Helping your clients manage their money in retirement would be a lot easier if we, or they, knew how long they were likely to live.

In a world where buying a secure income has become less common, having a realistic picture of their life expectancy and the possible range around that average figure is even more important. And while this can sometimes be a difficult issue to raise with clients, there are some important pointers that could help them avoid some of the pitfalls when thinking about life expectancy.

What are the misconceptions?

The first big misconception comes from the figures we read in the newspapers for ‘life expectancy’.  According to the Office for National Statistics, life expectancy at birth in England is just over 79 years for a man and just under 83 years for a woman. Any client turning 65 and hearing these figures might assume that their money only needs to last them 14 years if they’re a man and 18 years if they’re a woman. 

But, of course, they’d be wrong.  A lot of people don’t make it from birth to pension age - this decreases the average figure for life expectancy at birth. Amongst those who do make it to age 65, the ONS says that on average, men can expect to live for over 18 years more and women can expect to live around 21 years more. This is already 3-4 years more than the life expectancy at birth figures.

But there are two reasons why even these numbers could be misleading as a guide to how long your client’s likely to live.

The first is that there’s a link between wealth and life expectancy. As the ‘Cridland Review’ of state pension ages highlighted, even within a single city, there can be a difference of several years in life expectancy between the least and most deprived areas. If we assume that people who seek financial advice are on average better off than those who don’t, it would be likely that the life expectancy of clients as a group will tend to be greater than national average figures.

A second reason to be careful with the published figures is that there are two ways of measuring life expectancy – ‘period’ life expectancy, which takes account only of past changes in longevity and ‘cohort’ life expectancy which also includes projections of future changes. Many published figures are for ‘period’ life expectancy, so they don’t take account of the long-term improvements in life expectancy that we’ve seen in recent decades.

Helping your clients

A good place to point clients to give them a more realistic set of expectations is the ONS calculator, ‘What are your chances of living to 100?’ which uses cohort data and has the added advantage of giving not just average figures, but a likelihood of more extreme outcomes. 

And of course, once your client has an idea of how long they’re likely to live, you’ll want to help them understand how likely it is that their money will last as long as they need it to.

If your clients choose to flexibly access their savings, our drawdown governance service can help you monitor the income they’re taking and see when things are heading off track.

To find out more about our drawdown governance service and how it works, visit our website or speak to your usual Royal London contact.

About the author

Steve Webb

Director of Policy and External Communications

Steve Webb is Director of Policy and External Communications at Royal London. Before this he was Minister of State for Pensions between 2010 and 2015, the longest-serving holder of the post. During that time he implemented major reforms to the state pension system, oversaw the successful introduction of auto enrolment and played a key role in the new pension freedoms implemented in April 2015. He was awarded a knighthood in the 2017 New Year’s Honours.

Last updated: 24 Jan 2019

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.