Every major insurance company now uses the 1.7 million UK postcodes to help determine how much pension you get when you retire.
The result is that those in postcodes deemed to be better off, such as the Home Counties, are receiving worse pensions than, for example, those in less wealthy parts of Bolton or Birmingham.
The rate you are quoted for an annuity — which gives an income for life from your pension pot — depends on how long the pension company thinks you are going to live. The more healthy you are, the longer your money has to stretch and so the lower the rate you will get.
Until recently, annuity rates were based solely on your age, sex and health. But increasingly insurers are looking at postcodes to make a decision about life expectancy. And this is creating huge differences in payouts around the country.
According to official figures, average life expectancy is highest in Kensington and Chelsea in London at 89 for women, and lowest in Glasgow at just 77. And for men it is 84 and 71 respectively.
Figures from annuity specialist William Burrows Annuities show someone living in Birmingham or Glasgow will get more than £400 more a year in retirement — just under £10,000 over 20 years — than someone living in Chelsea or Cobham in Surrey. This is based on two healthy 65-year-olds with a £100,000 pension pot buying the best annuity available.
Postcoding is meant to reflect the higher life expectancy enjoyed by more affluent people. But Billy Burrows, director of annuities at William Burrows Annuities, says: ‘It’s a lottery and it is people in middle England who are being squeezed. We often see a low-paid worker from Guildford in Surrey being offered a worse rate than a rich businessman living on the outskirts of Newcastle.’
In 2007, Legal & General started the trend for using postcodes. Insurers claim this ensures poorer people with lower life expectancies do not subsidise affluent people who are expected to live longer. But John Lawson, head of pensions policy at Standard Life, says: ‘Postcodes are a very crude way of pricing risk and it throws up as many problems as it solves.’
To complicate matters further, insurance companies all have their own views of life expectancies in different postcodes. A male saver, aged 65 with a £100,000 pension pot living in Cheltenham, will get a monthly income of £587 from Aviva and just £517 from Prudential. This adds up to a £16,800 difference in income over 20 years. And it is becoming increasingly difficult for investors to find the best deal.
Most firms — including Aegon, Scottish Widows, Friends Provident and Standard Life — do not publish their rates on City regulator the Financial Services Authority’s website.
The post code system is also open to abuse. Mr Burrows says: ‘We’ve had clients with two homes registering using the less affluent postcode to get a better pension.’
Insurer Legal & General says it uses the full postcode when determining annuity rates. This ensures someone living in a poorer part of town is likely to receive a bigger pension than someone living in a wealthier neighbourhood. But L&G admits it could mean one person is offered a worse pension than his neighbour.
Phil Naylor, head of individual annuities at L&G, says: ‘We don’t pretend postcode modelling is perfect. But it is proven that average life expectancy varies across the country.’
The UK’s biggest insurer, Aviva, estimates that under the new pricing system a third of customers are better off, a third worse off and a third are in the same situation.
Source : Daily Mail
