Jeff Salway: The level of your retirement fund really can be a postcode lottery

Published on Friday 2 October 2009 21:03

TODAY marks 50 years since the humble postcode was first used in the UK. Bet you didn't know that. Far from losing significance as we head into the second decade of the new century, postcodes are playing a more influential role in our lives, particularly when it comes to money.

General insurers have long used postcodes to set the cost of policies including home and motor insurance. But now your postcode is increasingly being used to dictate how much money you'll have to live on in retirement.

Within two years, most annuities will be priced using postcodes in addition to factors already used, such as gender and age, Hargreaves Lansdown has predicted.

Three of the biggest providers – Legal & General, Aviva and Prudential – have already moved to postcode pricing and the others will follow or be left behind.

What does this mean for you? In short, if you live in a postcode with low life expectancy and health and socioeconomic problems, among other factors, your annuity will be cheaper as insurers assume they won't have to pay out for too long.

If you live in a more prosperous postcode, the opposite applies and you'll get an inferior income from your annuity. So, if you're lucky enough to be in an area where insurers assume you are healthy and wealthy, it gives you even more reason to shop around for a competitive annuity to make up the difference. And if you smoke like a chimney, drink like a fish and walking to the pub is the most exercise you get, brag about it to your annuity provider and get an enhanced annuity, especially if it thinks you're a paragon of virtue.

THE Office for National Statistics has revealed that the savings ratio rose to 5.9 per cent in August, still short of the long-term average of 6 to 8 per cent but higher than in recent years. This doesn't mean we're putting money away for the long-term, however.

The savings ratio can be misconstrued. It isn't money being put away in savings accounts, but the percentage of monthly income that is not being spent. Crucially, it includes money used to repay debts, which is a big reason banks and building societies are not seeing much of that saved money.

Low savings rates and a lack of confidence in the short-term prospects of the economy are deterring households from putting unspent pounds into a savings product to earn interest. It's more about prudence than a desire to save, with more people paying down their mortgages and spending less on non-essentials. It's also common sense, with the cost of debt outstripping the rewards from savings.

Banks and building societies are not promoting savings rates that would compel more people to put their money away. Prudent households are, on the face of it, being penalised by pathetic savings rates, although the difference between the average rate available and the best buys continues to widen. With the Isa allowance rising for over 50s from Tuesday, more attractive Isa deals are being launched, although the highest, around 4.6 per cent, require savers to lock their money away for a specific period.

It also needs to be put into perspective. We're spending less than we were for most of this decade, with the ratio falling to -0.5 per cent in early 2008. But those years were characterised by unsustainable credit-fuelled spending, while the use of disposable income to pay down mortgages has been driven by the record low repayment rates many homeowners are enjoying. The savings ratio is likely to continue rising, but banks and building societies won't be the beneficiaries.