The affluent lose out with pension annuities
The mighty Prudential is now paying lower pension annuity rates to people with posher (more affluent) postcodes. This could affect many pension savers and could cost thousands of pounds of lost retirement income.
We now have Prudential, Norwich Union and Legal & General calculating pension annuity rates according to where you live, because people in affluent areas tend to live longer. Retirees with a postcode that places them in an affluent area such as Kensington in west London, are likely to see their incomes drop by up to an estimated 5%.
Prudential and the other insurers, which between them accounted for 55% of the pension annuity market last year, claim the new approach is fairer since wealthier people tend to live longer. They should therefore draw a lower income from the pension annuity “pool” than those with a lower life expectancy.
These insurers already take age, gender and factors such as smoking into account when setting a pension annuity rate for retirement income. By adding postcodes, they are following the example of car and home insurers.
Prudential has gone further than the other two companies. People living in less affluent neighbourhoods will see up to a 5% increase in their pension annuity. A Pru spokesman said: “We are pricing annuities more accurately to reflect the risks being underwritten. Where someone lives will become an additional rating factor to age, gender and fund size as there are known links between dietary habits, exercise and wealth, and where you reside.”
A single man of 60 living in Kensington would receive a pension annuity of £6,721 a year from a £100,000 fund under the new regime, compared with a pension annuity of £7,181 for a man in the same circumstances but living in Dundee and a current rate of £6,881.
The Dundee resident will enjoy a 4% uplift in his pension annuity income, while the man living in Kensington would receive 2% less as a result of the change. On a £50,000 pension fund, the man from Dundee would receive £3,587 a year, up from £3,421 now – assuming the same pension annuity conditions. The Kensington saver would get just £3,342, Prudential said.
What are you supposed to do…move as you buy your pension annuity at retirement?
