Postcode pensions give less to rich neighbourhoods

Published on Tuesday 23 September 2008 02:06

PENSIONERS living in more affluent areas will receive smaller retirement payments because they are predicted to live longer, under new schemes introduced by insurers.

Norwich Union yesterday become the third major pension provider to decide to use customers' postcodes to determine the size of their annuity.

The company claimed that 70 per cent of its customers converting their pension pot into an annuity, which provides them with an income for the rest of their life, would be the same or better off following the move.

The 30 per cent who are likely to be worse off will be those living in affluent areas, as they are expected to live for longer.

The group also plans to include people's marital status and whether or not they smoke in its pricing model from the end of November. These factors are currently not included in pricing for standard annuities, although smoking is taken into account for impaired life annuities.

Clive Bolton, Norwich Union's director of annuity business, said: "Many customers will benefit from these changes as we tailor quotes to better reflect their individual circumstances and lifestyle." He added that until recently, more pricing factors were used in calculating the cost of pet insurance than were used in calculating annuity rates.

More than half of new pensions are subject to postcode pensions, with Norwich Union becoming the third major provider to adopt the system in the past year, following Prudential and Legal & General.

Nigel Callaghan, of the independent financial advisers Hargreaves Lansdown, predicted that by next year the entire market will have changed.

"The days of standard annuity pricing are over. Others will be forced to follow suit, otherwise they will be left behind. All the companies I speak to are considering it," he said.

However, pension experts said that although there would be some winners, they would be very few in number. People in the poorest postcodes tend not to save up for a private pension, or have a very small pension pot, and would be unable to take advantage of the better rates, they claimed.

Stuart Bayliss, director of Annuity Direct, said: "You have to ask whether you start to devalue savings by giving out postcode annuities. In the end, there will be lower annuity rates across the whole market."

Those that will do worst under postcode pricing are people living in areas such as Kensington and Chelsea in London; Crawley, West Sussex; Westminster; Rutland; East Dorset and West Somerset, as they are expected to live to 84 or over if they have made it to retirement age, according to figures from the Office for National Statistics.

Glasgow, Inverclyde, North Lanarkshire and West Dunbartonshire come bottom of the life expectancy league table, with males expected to die before the age of 80, even if they make it to retirement age.

BACKGROUND

WITH a shrinking state pension, combined with the slow demise of company "final-salary" pension schemes, more workers rely on a defined contribution pension scheme.

Insurance companies argue that paying varying amounts to people living in different postcodes is a fair system – and one that is used for all other insurance products, including motor insurance and even pet policies.

Despite the falling rates, annuities have become increasingly popular as people realise they can no longer rely on the state pension to provide them with enough income to survive.

The basic state pension is currently 90.70 a week for a single person and 145.05 for a couple.

A report by Clerical Medical in July found pensioners are paying 36 per cent more for their goods and services than they were ten years ago.

The report found that the 36 per cent hike compared with a 32 per cent increase in retail price inflation. The group said housing costs had been the key driver behind the increase, with these rising by 69 per cent since 1998.