Legal & General warned this year would be increasingly difficult for UK financial services, as putting more money aside for holders of annuity contracts living longer weighed on 2007 profits.

The life assurer said it had added £269m ($541m) to reserves for holders of annuity contracts – which pay an income until the owner dies – living longer.

L&G now assumes a 65-year-old man buying an annuity will live 25.1 years – giving him a life expectancy of just over 90 – compared with 23.8 years previously.

“We are not at all embarrassed about what has happened over the last five years, including [the longevity charge] on the annuity portfolio. It has more than paid its way against the original assumptions,” said Tim Breedon, chief executive.

For dear life

Life expectancy for those lucky enough to make it to 65 has been rising fairly steadily in the UK for more than 150 years, writes Norma Cohen.

But in recent decades, the rate of improvement has been so swift that it has surprised experts.

Charles Cowling, managing director at Pension Capital Strategies, which helps companies control pension liabilities, said: “Across the FTSE 100, the assumption is life expectancy will improve by 1.5 years over the next 20 years. “

“However, in the recent past, life expectancy has been improving by two years every decade.”

Nevertheless, the longevity hit, together with a £66m charge for customers surrendering policies early, and one-off gains in 2006 meant operating profits, calculated under European embedded value principles, fell from £1.23bn to £912m in 2007, below analysts’ forecasts.

Pre-tax profits under International Financial Reporting Standards fell from £1.93bn to £795m, after the longevity charge and £76m of claims, following recoveries under L&G’s own reinsurance policies, from last summer’s floods.

L&G had “no material exposure” to credit impaired securities and “immaterial” holdings of securities backed by subprime mortgages, Mr Breedon said.

It had, however, begun “opportunistically” buying US and European corporate bond collateralised debt obligations, because valuations were attractive.

Mr Breedon forecast the life and pensions savings market would be flat this year, after several years of strong growth. A final dividend of 4.10p (3.76p) makes a total of 5.97p (5.55p) payable from earnings per share of 11.18p (23.95p).