Moving with the times

As a result of higher standards of living and medical advances, life expectancy is improving. You only need look at the number of telegrams the Queen has been sending to people celebrating their 100th birthday to see the improvement. In 1917 only seven men and 17 women received 100th birthday greetings sent on behalf of King George V. In contrast, 2013 saw the Queen sending a total of 13,000 birthday messagesi. According to the Office of National Statistics around one in three babies born in 2013 will live to celebrate their 100th birthdayii.

Underestimating length of retirement

The average life expectancy for a male currently aged 65 is 18 years and 20 years for a femaleiii. But these figures ignore expected future increases in lifespan and are averages, and many people are likely to live longer than this.

Almost 85,000 people, (31,000 men and 54,000 women) aged 65 in 2013 are expected to celebrate their 100th birthday in 2048iii.Therefore, planning to save enough funds to last in retirement on the basis that you will live for your average life expectancy could be inadequate for many people.

People are likely to live longer than they think they will and underestimating life expectancy has a huge impact on retirement planning. People are unprepared for the fact they will have to support themselves in retirement for many years. Educating customers on the potential risks of living longer than expected and how to put plans in place to counter these risks is key. Putting money aside or into a pension is a must, but so is making the most of savings on reaching retirement. An annuity offers one way of providing a guaranteed income stream for life.

Growth of enhanced annuity market

The annuities market has been growing and is expected to expand rapidly as increasing numbers of the baby boomer generation now reach retirement, and with increasing numbers of these holding defined contribution pension funds. Key to continuing success and competitive advantage for providers in this market is the accurate modelling of longevity risk.

So it's not surprising that the retirement market has seen significant expansion of non standard annuities in recent years, with enhanced annuity sales now in excess of 30% of the total market and more than half of the open market. This is where factors affecting future longevity are taken into account in determining annuity rates, such as health conditions like hypertension, diabetes or cardiovascular disease. Those customers who don't suffer from a medical condition may still be able to benefit from an increased rate due to certain lifestyle factors.

As more providers enter this market with increasingly sophisticated and finely tuned underwriting, increasingly around specific lifestyle factors, intermediaries will need to understand the positioning of these product variants in order to present the most appropriate solution that best meets the individual needs of their clients.

Managing longevity risk is at the very heart of Friends Life's annuities strategy and forms a crucial foundation on which we build our annuities business. Our longevity experts' detailed research has helped us develop our new open market lifestyle annuity product. There are already many annuities available on the open market catering for people with serious medical conditions. But there are also many people without these conditions who could still qualify for an increased income purely due to lifestyle factors alone. That's why our longevity experts have worked hard to develop a product that does just that.

Our specialist approach focuses on how we can judge mortality risk by complementing the existing Common Quotation Request form with additional supplementary lifestyle questions. Lifestyle factors such as smoking history, alcohol consumption, occupation and family medical history are all taken into account. In launching this innovative new product, we are seeking to bring the benefits of an enhanced annuity to more people than ever before.

Importance of advice and guidance

With more providers entering the open market, increasing competition in the enhanced space, there is clearly a crucial role for intermediaries to help customers consider all these product variants to ensure customers are getting the very best deal for their personal circumstances. There's no going back once an annuity is purchased, making the wrong choice could be the equivalent of taking a permanent pay cut, potentially equating to hundreds, or even thousands, of pounds of lost income. And with retirement potentially now lasting over 30 years, that's a long time to have to struggle by if you get it wrong!

About Friends Life

Friends Life provides pensions, investments and insurance for over five million customers. One of our key business lines is Retirement Income and we're committed to increasing our penetration of the growing 'at retirement' market. With a large number of retiring customers we're already an experienced annuities provider, we currently pay over £800 million in pension income a year to more than 380,000 customersi.

And it's from these strong foundations and through leveraging this experience, that we have recently launched on the open market with the Friends Lifestyle Annuity. Available through major portals, our new annuity primarily focuses on clients lifestyle factors to help provide a higher income in retirement. At Friends Life we are striving to provide your clients with the best annuity to suit their retirement needs. We truly believe in our approach that recognises the individuality of your clients and brings some new and original development to the enhanced annuity market.

i Friends Life annuity customers – Sep 2013