I segment the annuity market into three segments which I call small beer, Middle Britain and fat cats. There is no insult meant to small beer clients as they often refer to themselves as just that and I spend a lot of time helping them get the best deal at retirement. In the past, this group was not best served by the industry but now small beer annuities may be better value than fat cat annuities.
The reason for this is that more companies are moving to postcode annuities. 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 healthcare. However, this is not always true because as we all know some wealthy people have very unhealthy lifestyles.
I got so stressed trying to work out what was happening with postcode rates that I decided to dig deeper and compile my own list. The table below shows the annuity rates for a man aged 60 investing £100,000 in a single life level annuity from a well known provider of postcode rates.
The difference between the best-paying annuity and the worst is 4.2 per cent or £286 a year. One of the interesting things about this list is that apart from ME1, all the other postcodes are those of actual clients of mine and have purchased annuities of around £100,000.
I got so stressed trying to work out what was happening with postcode rates that I compiled my own list
At first sight, postcode annuities look like a good thing but as the table shows, Middle Britain is being disadvantaged. For instance, KT6 is my postcode and living near Surbiton is surely typical of Middle Britain but the annuity rate is much lower than my rich farmer client in Hull or my businessman client living in Newcastle.
Small beer annuitants could also be disadvantaged as postcode annuities may make it harder for people to find the best annuity rates. The problem is that Middle Britain clients who stand to benefit most from annuities are seeing the value for money from their annuities slipping away as the effects of enhanced and postcode annuities transfer value to smaller annuities.
But it is not all bad news because Middle Britain may be able to claw back this loss in value by sharing some of the risk with the annuity prov- ider in return for the prospects of some income growth.
Billy Burrows, Director The Retirement Partnership