Affluent retirees penalised by postcode lottery
Norwich Union is to introduce postcode-rated annuities, in a move that could penalise healthy and wealthy retirees.
The insurer plans to start looking at where annuity customers live, as well as their martial status and whether they smoke or not, when deciding how much retirement income to offer them. It will use this information to gauge customers’ life expectancy, with the best annuity rates offered to people with lower life expectancy.
However, there are fears that those living in affluent areas will be penalised as they tend on average to live longer. People living in Kensington and Chelsea, where the life expectancy for men is currently 82.2 years or 86.2 years for women, are likely to be some the thousands of retiree disadvantaged by the move.
Legal & General adopted a similar postcode pricing system last year, and experts say other pension providers will follow suit in the months ahead.
Nigel Callaghan, a pensions analyst at Hargreaves Lansdown, says providers are increasingly looking to “squeeze extra value” out of the way they rate people for annuities.
“Investors will increasingly be offered a rate that reflects their own life expectancy, rather than one from a large pool of people,” he adds.
This will lead to a wider gap in annuity rates, depending on investors’ health and wealth, and better returns for people who have a shorter life expectancy.
The downside is that people who have healthy lives or live in affluent areas are likely to see their pension income squeezed.
Despite every retiree having the right to shop around for an annuity product - known as the Open Market Option (OMO) - around two-thirds of people still accept the first offer made to them by their insurance company.
Callaghan adds: “From investors’ point of view, the wider choice on offer only has value if they actually exercise that choice - everyone must shop around with their pension fund at retirement. If you don’t, then you are going to miss out.”
The changes at Norwich Union, which come into effect on 22 September, will see 30% of customer worse off.
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.