Aside from your health and gender, where you live is also used by many pension providers when calculating pension annuity rates. Because of the discrepancy in life expectancy between wealthier and less privileged parts of the UK, a risk element is factored into the annuity calculation by some pension annuity providers. But some have argued that this means that people who live in areas with a higher level of life expectancy are effectively subsidising those who live in areas with lower life expectancy.
A conventional annuity is one of the most simplest pension income plans on the market. All you do is give the pension provider a lump sum on your retirement in exchange for a fixed income for the rest of your life. Insurers have traditionally calculated the rate they offer you based on your health, lifestyle and gender. But now advanced IT systems can make much more accurate predictions how long you will live for, which includes data on your local area. An elderly man living in a prestigious part of West London will have on average a much longer life expectancy than a man living in the most deprived part of Glasgow for example. The gap can be as much as 13 years in some circumstance and some providers will add as much as 3% to annuity payments each year to those in areas with lower life expectancy.
The postcode is still only part of the overall calculation, argue the providers who use this method. However some annuity experts are not so sure than no-one will loose out under this system. Some have argued that logic states that if some annuitants are getting a higher rate and a higher income, then some annuitants must be receiving less as a consequence.
Some areas with higher than average life expectancy that are likely to be potential losers in the annuity postcode lottery include;
- East Dorset
- Hart
- Uttlesford
- Wokingham
- South Norfolk
- Chiltern
- Horsham
- Brentwood
- Crawley
For those with generous pension pots living in the leafy suburbs, the new system will mean standard annuity products becoming less important, it is argued. Those in this predicament will have to consider other options such as with profits annuities or income drawdown also known as an unsecured pension. People in this situation will be much more anxious to keep money invested, as their income from an annuity will be lower. Moreover pension providers will not be wanting to carry the financial can of everyone living longer, they will want their customers to shoulder the burden as well. Long term annuities will become less attractive to people with a long life expectancy and a large pension pot, who will instead look for other means, such as delaying the purchase of an annuity. In short, the healthy and wealthy are the ones most likely to delay purchasing an annuity.
Overriding all of this debate is the fact that retirees should shop around for the best annuity deal on the market, and not take the first offer from their current provider. In the grand scheme of things, this is much more important than any changes that arise due to postcode profiling. For example, the 3% added to an annuity pails into insignificance compared to the 30% or more lost by not exercising the open market option. It therefore seems extraordinary that around two thirds of annuitants still take the deal offered from their current provider.
