Government could set up a life expectancy calculator based on actuarial annuity models
by Dr. Ros Altmann
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Any figure will only be an average – give people a range and regular updates as health changes
And tell people how long they will live, not when they will die!
Pensions Minister, Steve Webb, has proposed a novel way of helping people plan their retirement finances. He suggests providing people approaching retirement with information about when they can ‘expect to die’. This is supposed to help them realise their pension fund needs to last for many years and they should plan carefully if they don’t want to run out of money.
Any forecast is only an estimate – give a range, not one figure: It is important to help people understand that any forecast of their life expectancy is only a very rough estimate. Perhaps a range of years would be more useful than a point estimate. All such forecasts are only an average, with many people achieving much longer or shorter lifespans. Therefore, providing just one figure might be misleading, with people still running out of money if they live longer than average.
Government could provide a national life expectancy calculator: Government could harness the skills of private actuaries at insurance firms and specialist annuity providers to produce national estimates of average life expectancy, based on a range of factors relating to individual health, past lifestyle, current lifestyle and so on. The one-to-one retirement guidance could use this as part of face-to-face discussions when assessing how much to take out of a pension fund each year.
Life expectancy will change as health changes – needs regular updating, not a one-off figure: It is important for people to have an update of their life expectancy regularly, to take account of any health changes they experience. Estimates of life expectancy will be much more accurate at age 75, than at age 65 and as people live to older ages, their health issues become clearer and their own individual life expectancy will change. Therefore, to be more meaningful for financial planning, any forecast needs to be updated at regular intervals.
Telling people when they can expect to die is a turn-off – most would respond better to being told how long they are likely to live: Of course, we want people to realise their pension money may have to last longer than they might expect, but to do that we need to engage them, rather than put them off the whole topic. Actuaries may find forecasts of date of death useful, but most people would relate better to a forecast of how long they are ‘likely to live’. This is not just semantics. It is vital to help people want to think about later life financial planning. Too often, the pensions industry puts people off, using terms which are not user-friendly. A life expectancy calculator can only help if it used in the right way.
Dr. Ros Altmann