Post code pension annuities

Increasingly in the UK it seems that those who have worked hard for what they have got are penalised. We have seen increasing levels of taxation, reductions in tax breaks or real levels of tax allowances, means tested benefits and people having to sell their own homes to pay for care in their old age.

This penalisation is also spreading through the pension annuity industry. When you come to retire and purchase a pension annuity, being in good health and living in a nice area, the byproduct of being wealthy, works against you.

The introduction of the post code address factor to annuity rate calculation was made initially by new insurers who wanted to offer higher annuity rates to those deemed to live in poorer areas with lower life expectancies.  Unfortunately, this works in reverse for those living in richer, wealthier areas.

Post code annuities are used by insurers and their actuaries to set different rates for annual pension plans according to location of the person purchasing the annuity. Customers who live in an area where the average life expectancy is statistically below average can receive better annuity rates. Those in areas where the average life expectancy is statistically higher average can expect lower annuity rates.

It has been estimated that 40 per cent of people could be better off if they bought an enhanced pension annuity product, which uses personal information about customers in order to come up with an individual rate annuity rate for their retirement income.

This can be very good news for smokers and those residing in the less desirable areas of the country. However those buying an annuity that live in areas of prosperity and good health are likely to see lower annuity rates and their annuity rates decline.

Apart from selling up and moving to an area with a lower average life expectancy and better resulting annuity rates, affected individuals will have to choose between settling for a lower annual annuity payment or considering the alternative options for converting retirement savings into an income, such as income drawdown or investment linked annuity products, and effectively remove themselves from a system where they are pooled with other customers with similar characteristics to themselves. There are risks associated with such products and investors are still exposed to ongoing investment risk until all other their pension fund has been vested. Therefore, you could end up worse off overall.