Round Up Spring 2019

Managing longevity In many retirement advice decisions, how long the client will live can be more important than the return on investment. While the average male at 65 may be predicted to live to 87, statistically this varies by around 20 years depending on their health and lifestyle. Most advisers have become very good at modeling cash flow, but struggle to model longevity.

FCA rules require all advice to be personal to the circumstances of the individual. Using standard longevity predictions, from ONS or similar, is not personal nor sufficient. It’s like assuming all clients have an average pension pot and the same attitude to risk! Advisers must assess longevity on a personal basis to avoid challenges later on. One solution to the longevity conundrum is to obtain an annuity quotation. 70% of consumers, at retirement age, qualify for an enhanced/ impaired annuity, yet far too many annuity quotations have no medical information. Obtaining a standard annuity quote, with no medical information, is likely to lead to a lower value annuity quotation, and to incorrect advice. Advisers are already being sued, and have FOS decisions against them, for not considering an impaired annuity. Like all advice recommendations, there must be clear evidence that the consumer’s personal circumstance, in this case their health has been properly assessed. If advisers don’t have clear evidence that they understood the client’s health and have assessed their longevity, then they have little evidence to defend themselves against a claim. The requirement for detailed medical advice for annuities has slowly increased over the years. Annuities used to be all standard. Then the industry added smoker rates. Then impaired and enhanced rates. Advisers need to modify the way they assess client’s medical status to keep in line with these changes. It’s common for advisers to approach this by way of a quick conversation, asking the client about their health, prior to deciding

whether or not that consumer is in good health. Though if a nurse were to have a similarly quick conversation with a client, and said they could buy their draw down online without advice, there would be outrage, as the nurse is not qualified to make such decisions. Making this sort of decision in ten minutes is likely to be inadequate for a significant number of clients. It’s unlikely the client would divulge all their financial information to a nurse, as the nurse doesn’t understand the topic. In the same way, it’s unrealistic to assume a quick conversation on someone’s health is sufficient. Clients won’t necessarily divulge all the relevant information to their advisers as they’re not medical experts, nor is it likely that advisers will understand what they’re being told. What’s more, these areas can be personal and uncomfortable for the client to discuss. Statistics show that although 70% of consumers qualify for an enhanced annuity, the average rate granted is far less than this. MorganAsh provide two solutions for advisers; full medical underwriting annuity quotes, and individual longevity predictions. Both solutions are based on the client’s individual health and lifestyle circumstance and involve a full medical assessment of the client’s health. The life planning report provides an estimate of the client’s longevity (see example chart ‘likelihood of survival over time’), as opposed to an annuity quotation. The life planning report has the advantage of giving estimates of longevity per year, so understanding the chance of survival at say age 90 being 30% or 1% can be used with the estimates of returns of different investment classes. If there’s a chance an annuity may be part of a retirement strategy, then it’s better to obtain an annuity quotation. If an annuity is never going to be part of the strategy, then a life planning report gives a better estimate of longevity at different ages.

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