The wrong postcode can make your pension gap even worse!

on Jan 08 in My house is my pension , My pension is fine , Near retirement , Other assets enough tagged by Brian Wood

If you live in a good area of London, you might have to pay 4% more for your pension than if you lived in Birmingham or Glasgow according to a recent article in the Times (you can read the full article here ).  This comes at a time when the cost of buying a pension is already at an all-time high.

The reason is that more and more insurance companies are now using your postcode to work out the price of your annuity – on the basis that people who are well-off tend to live longer than people who are not.  (This doesn’t affect any final salary pensions you have, because these don’t depend on annuity rates.)

While you can’t blame insurance companies for wanting to be more accurate in their pricing, the side effects are greater complexity and risk for the average person who is trying to plan for the future:

  • If you live in a “well-off” area, you might have a larger pension pot and more valuable house than average – but this advantage will be reduced because you will have to pay more for your pension.  And if you live in this type of area but don’t have much wealth, you still have to pay more!
  • It is much more difficult to find out who offers the best deal, because these ‘postcode’ annuity rates are not published on the FSA website.  You have to obtain a separate quotation directly from each company.

What can you do about this?  Here are some ideas:

  1. Even though it is now more difficult, shop around for the best annuity rate by using your “open market option”, which is your right to buy your annuity from the provider you choose.
  2. If you are in poor health or are a long-term smoker, see whether you can get better annuity rates that reflect your shorter life expectancy.
  3. Put off your retirement for as long as you can.  If you defer your retirement, you will start to benefit from the ‘turbocharger’ effect that increases your eventual pension by more than you might have thought.
  4. If you do have to retire, defer the purchase of an annuity for as long as you can by using a ‘drawdown’ option or flexible annuity.  These options are more complex than normal annuities and have their own risks, so you would need to obtain financial advice.

One Comment

  • I am having a rant about postcode annuities at the moment – I agree that the less well off shouldn’t subsidize the better off but post coding is a blunt instrument.

    Yesterday I took quotes for someone living within a stone throw of London Bridge (upper middle Britain I would say) and his annuity was 1% higher than a Surbiton postcode.

    This is post coding working in the wrong direction – i.e. more income for someone probably better off

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