Personal Finance – The price of life just got higher

A piece of wonderful news for middle-aged men that will put a smile on female faces and might cost the government a packet? No, we’re not talking about Viagra, but about improving mortality.

Figures released by the Institute of Actuaries confirm what we have all suspected for a long time – that the odds of meeting your maker tomorrow have never been so low.

Death will catch up with us all in the end, but the Grim Reaper had better have a good book, because the chances are he will need to be patient.

Improving mortality rates have important implications for financial planning.

They impact on the price of life insurance, income protection, endowments and annuities. Most significantly, they mean that financial advisers must take another look at planning for retirement; people will live longer and need ways to stretch a limited pot of capital further.

The report on mortality come from the grimly named Continuous Mortality Investigation Bureau, a unit run by the Institute of Actuaries. Its job is to pool data from UK life insurers and produce benchmark statistics on the odds of life and death.

Colin Kirkwood, chairman of the CMIB, says: ‘Our look at the statistics confirms that people are tending to live substantially longer now than they were even a few years ago.’ Back in 1960, for example, a man aged 30 could have expected to survive to age 73. On the latest data, a 30-year-old can expect to live past his 79th birthday.

The CMIB also tries to calculate the probability of a person of a given age dying in the next 12 months (see table).

Tony Leandro, CMIB secretary and actuary with Barnet Wadding says: ‘While mortality is improving across the board, the biggest changes have been for men and, specifically, for men in their late 40s, 50s and early 60s.

Here medical advances and improvements in lifestyle and diet have had the greatest impact.

Changing mortality is likely to have its greatest impact on annuities.

As life expectancy increases, the annuity rate will fall, because the cash has to stretch over more years. The new report will not change annuity rates overnight because insurance companies take time to adjust their figures and many have already been taking improved mortality into account.

But it does send a warning signal to financial advisers.

Stuart Bayliss, managing director of specialist broker Annuity Direct in London, says: ‘Over 1999, I estimate the improving mortality will translate into a 3% fall in the standard annuity rates. Some of this will be due to a process of insurance companies catching up. They have been aware for some time they should adjust for improving mortality, but they have not been fully implementing changes because falling gilt yields last year meant they were already slashing rates.’

One implication of the trend to lower rates is that the traditional concept of buying a guaranteed annuity linked to gilts will change. Pensioners may have to take more risks with their cash. ‘Gilt-backed annuities were very appropriate for a world in which a man retired at 65 and might expect ten years of retirement before death at 75,’ says Bayliss. ‘But they are not so good if a person retires at 55 or 60 and then lives to 80 or 85.

The annuity then stretches for 25 to 30 years. You need to build in some investment growth and get pensioners to take a little more risk with their money.’

But changing mortality has other, more fundamental impacts on retirement.

Stewart Ritchie, director of pensions development at Scottish Equitable, says we may have to rethink our attitudes towards the end of our working lives, which might include dumping the concept of early retirement. ‘We will have to review our own expectations of when and how we will retire.’ says Ritchie. ‘Do you want a long but poor retirement, or a shorter retirement in which you will be able to afford to enjoy life?’

Stephen Womack is a financial correspondent with the Mail on Sunday.

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