Scots set to cash in on insurer's postcode annuities

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THOUSANDS of Scots could benefit from higher pension payments after Norwich Union announced the introduction of postcode annuities.

Most insurers calculate annuities – the fixed income for life given in exchange for a pension fund at retirement – on the basis of the life expectancy of their customers, as well as an individual's age, gender and pension fund size. As a result annuitants living longer – typically those from more affluent areas – are effectively subsidised by those in poorer areas with shorter life expectancy.

But under the postcode system, to be introduced in September, those living in affluent areas will be offered lower rates than those in less well-off neighbourhoods. Customers will be divided into nine categories, with the lowest income postcodes across the UK in one group – such as Glasgow's Gorbals and Tower Hamlets in London – and the most affluent in another bracket.

The insurer predicts that, while 30 per cent of annuitants will lose out because of the changes, the other 70 per cent will be in a similar or better position. With Scottish life expectancy below the UK average, many Scots retirees will fall into the latter category.

"This is good news for Scots because they are penalised by the assumption that they were experiencing English mortality rates, so they had less of a pension," said Gerry Devenney, principal at Punter Southall in Edinburgh. "If the postcodes bear close relation to geographical areas Scots generally will be able to get bigger pensions, especially those in the Glasgow area."

Another major insurer, Legal & General, adopted a similar approach to pricing annuities last year while postcode data have long been used for car and home insurance.

Nigel Callaghan, pensions analyst at Hargreaves Lansdown, predicts that more annuity providers will go down the same road, leading to a greater difference in rates based on an individual's health and wealth. With people offered a rate depending on their life expectancy, rather than on the life expectancy of a large pool of annuitants, standard annuity rates for healthy lives are likely to fall, he added.