Julian Knight: Postcode pensions and the perils of living in posh places
Sunday 11 November 2007
Where you live is a good indicator of life expectancy. Set up home in leafy Surrey or posh Kensington & Chelsea and you're odds-on to notch up 80-plus years. Live in Glasgow or Manchester, however, and you'll be lucky to reach 70.
Such stark differences have been around for donkey's years but only now is an insurer taking location into account when deciding on annuity levels. Legal & General said last week that it will look at annuitants' postcodes as part of assessing the level of income they will pay them in retirement in return for their pension pot.
The upshot of this is that people who live in postcodes where life expectancy is high will get a lower annuity income than those living in areas with below-average life expectancy.
For decades, in the main, annuity levels have been based on gender and the age at which the individual chooses to convert their pension pot into an annuity. Women get less than men (because they live longer) and the older the annuitant the higher the income paid (as they have on average fewer years left to live). In the light of such blunt calculations, L&G's move is to be welcomed. Anything that finesses annuity calculations may lead to more fairness. But why stop at postcodes? Occupation is a major determinate (not just indicator) of life expectancy. Accountants live almost 15 years longer than labourers.
Some providers already take medical history into account – annuity income can be up to 20 per cent higher for people who have a heart condition, for example. Tom McPhail, pensions expert with advisers Hargreaves Lansdown, says this trend is only going to grow as insurers actively choose to gear their annuity offering to people who, to put it bluntly, aren't likely to live long.
The insurance company gains because it has more precise models on which to base annuity calculations – and assess likely profit – and the annuitant benefits because he or she gets the maximum income – and if they beat the insurer's life-expectancy calculation, then all the better.
However, this gradual finessing of the market is not going to make a blind bit of difference to the majority of people buying an annuity. This is because two–thirds of those who buy an annuity do so straight from their pension company. By failing to shop around for the best annuity – using what's called the open-market option – they are missing out on income for the rest of their lives.
Even people who would qualify for a bigger annuity – by having a condition likely to shorten their lives – are sitting on their hands. Mr McPhail describes this as "madness" and he's spot-on.
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