Pensions set for postcode lottery

A leading insurance company is running a pilot scheme using postcodes to calculate pension payouts.

Legal & General is exploring the benefits of using postcodes to assess people's life expectancy when setting annuity rates.

People with personal pensions and members of defined contribution company schemes have to use their pension fund to buy an annuity, which provides them with an income for the rest of their life, when they retire.

Insurers currently base annuity rates on a range of factors such as age and sex to assess how long the person is likely to live.

But L&G said there was a wealth of evidence that suggested where someone lived also influenced their life expectancy.

Postcodes are already used to assess risk for other financial products, such as motor and home insurance, and L&G said extending their use to annuities was a logical step forward.

The pilot study aims to establish the extent to which consumers would benefit from their postcode being used to calculate their life expectancy.

Simon Gadd, managing director of L&G's annuities business, said: "Using other indicators of life expectancy, rather than just sex and age, is a natural evolution for the pension annuity market.

"A customer's medical history and lifestyle factors such as smoking, obesity and high cholesterol are now readily accepted in the pricing of enhanced annuities.

"Through our extensive experience data we believe that postcodes are a reliable rating factor and will mean we are able to more accurately assess and so price the longevity risk for each customer."

He said the continuing improvements in life expectancy made it increasingly important that annuity providers became more sophisticated in the way they assessed risk and used all the relevant information and tools available to them.

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