Postcode annuities

Annuity companies are adopting more sophisticated ways of pricing their annuity rates in a bid to increase their sales and offer better value to customers. This process started more than 20 years ago with the introduction of impaired life annuities for the seriously ill, followed by smoker annuity rates and then enhanced annuities for those with any medical or lifestyle condition that might reduce life expectancy.

The latest underwriting trick is postcode annuities where the rate depends on where people live. The first company to adopt this approach was L&G who launched postcode back in Nov 2007 with Norwich Union (now Aviva) and Prudential following. Now Saga is offering postcode annuity rates provided by Legal & General.

The theory is simple. Wealth is an important factor in working out a person’s life expectancy because those with more money can afford a better life style, including better health care. However this is not always true because as we all know some wealthy people have very unhealthy lifestyles.

The table below shows the annuity rates for a man aged 60 investing £ 100,000 in a single life level annuity from Aviva dependent on postcode.

The difference between the best paying annuity and the worst is 4.2%, £ 286 per year. One of the interesting things about this list is that apart from ME1, all the other postcodes are those of actual clients of Burrows & Cummins would have purchased annuities of around £ 100,000.

My conclusions and concerns about postcode annuities are:

• Middle England is being disadvantaged - KT6 is my postcode and living in a church property near Surbiton is typical of Middle Britain
• Some of the figures issued in the press can be misleading - The average postcode annuity does not apply to most investors with £ 100,000 to invest
• Postcode annuities may make it harder for people, even those with smaller amounts, to find the best annuity rates. For instance the FSA annuity tables do not include Aviva and Prudential