If you live in a well to do part of the UK your income from a pension annuity could be lower based on the higher than average socio-economic conditions in which you live. Among the factors which annuity companies look for when pricing an annuity is the average life expectancy of the various geographical areas in which annuitants live. The crux of the matter is that those living in the wealthier and healthier suburbs of the South will get a lower annuity rate than those living in the inner cities of the North, North-East and Scotland. This is because insurers predict they will on average have to pay out less to those living in less advantaged areas compared to those who live in more affluent areas who are expected to live longer. Some argue this is unfair as there are more important factors such as health and lifestyle. Others say this is just fairness and that insurance companies use geographical surroundings for many other types of insurance such as car insurance and house insurance.
To overcome some of the problems mentioned, you could opt for what is known as a with-profits annuity. Using a with profits annuity you share some of the risk with the annuity provider by investing some of your pension fund in fixed interest bonds, property and equities. This goes into various funds combined with revenue from the insurance companies themselves and then annual bonuses are paid out based on the performance of the fund. However. there is normally a minimum level of income supplied even if no bonuses are accrued. This differs from the performance of fixed interest bonds in that the differing types of investments mean that your income could go up or down depending on how they perform. This is suitable for those who don’t need a guaranteed level of income in retirement from an annuity, such as those who get money from a final salary scheme. Basically you speculate in the knowledge that your risk could be rewarded but always being aware that you could lose out. At the start of the plan and periodically thereafter you need to chose an ABR or Anticipated Bonus Rate of between 0% and 5%, if the bonuses are higher than your ABR you will get more income, if they are lower you will get less.
