Liz Booth examines whether reduced life expectancy figures post-pandemic are affecting how people plan their finances
The Covid-19 pandemic has created uncertainty in many aspects of life. For financial advisers, one of the questions now being considered is the impact it may have had on life expectancy and how that affects those approaching retirement.
In turn, the question becomes what it might mean for drawdown versus annuity conversations. There is also a question of whether the Covid-19 pandemic impact on life expectancy was a one-off or whether it has heralded the end of increasing life expectancy, or at least a slowdown in the rise of longevity figures.
Public Health England (PHE) reported that the Covid-19 pandemic led to the biggest year-on-year drop in life expectancy in England since statistics were first collected in 1981.
Back in 2020, the agency said “the very high level” of excess deaths because of the pandemic caused life expectancy in England to fall 1.3 years for men to 78.7 and 0.9 years for women to 82.7. This was the lowest life expectancy in England for both sexes since 2011.
The data always lags behind and not all countries have reported life expectancy data for 2020 as yet. But of those that have, PHE noted that Italy, Poland and Spain experienced similar decreases in life expectancy to England in 2020, while France had a smaller decrease. Germany had little or no relative excess mortality in men or women. The US and Poland had the highest relative excess mortality in 2020, in both men and women.
The long-term trend has yet to play out but, while health and nutrition are generally improving, insurers are also watching climate change closely to see whether that has an impact on longevity.
Pamela Cobb, joint lead of the demographic analysis unit at the UK Office for National Statistics’ Centre for Ageing and Demography, explains that overall, life expectancy has increased in the UK in the last century, albeit at a slower pace in the last decade.
She says: “Our national life tables provide estimates of ‘period life expectancy’, which is the average number of additional years a person would expect to live if current age-specific mortality rates continue.
We average deaths observed over more than three years to smooth out the impact of seasonal events such as a flu epidemic on the reported life expectancies.
The main effects of Covid-19 on financial advice and retirement income were less about product choices and more about the behaviours of clients as a result
“However, the coronavirus pandemic led to a far greater number of deaths in total and a higher rate of death in 2020 compared with recent years. It affected male mortality more than female mortality, which is why life expectancy estimates for females are unchanged from 2015 to 2017, at 82.9 years, but estimates for males have fallen back to levels reported for 2012-2014, at 79 years. This is the first time we have seen a decline when comparing non-overlapping time periods since the series began in the early 1980s.”
She adds that levels of mortality in 2020 were unusually high and explains that these life expectancy estimates rely on the assumption that the level of mortality during the period 2018 to 2020 will continue for the rest of someone’s life. “They do not mean that a baby born in 2018 to 2020 is going to live a shorter life. To get a better estimate of this, we need to consider how mortality and therefore life expectancy will improve into the future. It will be several years before we understand the impact, if any, of coronavirus on this,” she adds.
Planning for the future
Returning to the question of how financial advisers best support their clients through decisions around drawdowns or annuities as they manage their retirement, Jenny Holt, customer savings and investments director, Standard Life, says: “The pandemic brought the issue of our own mortality into sharp relief. To some extent, the main question when it comes to financial advice and retirement income has always in large part been about our own longevity. If we knew exactly how long our money needed to last, creating a financial plan would be a less complex task.
“The main effects of Covid-19 on financial advice and retirement income were less about product choices and more about the behaviours of clients as a result. Financial advisers reported many clients bringing their retirement plans forward, either due to reassessing their priorities or unfortunately due to redundancy.”
Ms Holt adds: “For other clients, investment volatility was a significant concern – particularly in the early phases of the pandemic – and many advisers reported speaking to clients about sticking to their plan and not making snap decisions about investments.
“Recent Financial Conduct Authority figures looking at how people access their pensions in retirement do not show a significant change in behaviour as a result of Covid-19. The same trends that were present before, namely a preference for drawdown over annuities, continued.”
She concludes: “In the longer term, we believe many advised clients will opt to take an annuity later in retirement to cover their core living costs. Doing so will allow them to maintain any inheritance aspirations they may have using their drawdown savings, without having to worry about covering their day-to-day costs.”
Liz Booth is contributing editor of PFP