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L&G and Hargreaves Lansdown team up for postcode pilot

Pensioners’ income in retirement could be calculated according to where they live if a pilot study launched by Legal & General and Hargreaves Lansdown proves successful.

L&G and Hargreaves Lansdown have teamed up to find out the benefits of using a customer’s postcode as an additional risk factor in determining the annuity income that may be provided.

Conventional non profit pension annuities are normally determined by using age and sex to assess life expectancy.

But L&G says there is evidence that suggests where a customer lives can also influence how long they are likely to live.

Postcodes are currently used in the pricing of other financial risks such as house and car insurance and L&G believes the application to pension annuities is a logical step forward.

The pilot will help to establish the extent to which potential customers would benefit from the additional risk rating provided by their postcode.

Hargreaves Lansdown says the postcode rating will not negatively impact on anyone. For example, people who live in a more affluent area will not get a worse annuity rate than they would otherwise have done if the calculation was simply based on age and sex.

But people living in a poorer area may get a better rate than they would have before.

Legal & General annuities business managing director Simon Gadd says: “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. With the continuing improvements in UK life expectancy, we believe providers should be more sophisticated in the way we assess risk and use all the relevant information and tools available to us.

Hargreaves Lansdown head of pensions research Tom McPhail says: “It is important that the annuity market continues to look for new ways to give investors better value for money. Unfortunately, many people’s pension funds at retirement can be quite small – the average is currently around £25,000, so people really need every penny of that pension fund money to buy them the best annuity income they can for the future.

“The annuity market has been very traditional in its approach to the pricing of the risks involved. Postcodes are already accepted for risk profiling in other areas of insurance, such as motor and household. Using just age and sex is a blunt instrument for annuity pricing and it’s a well established fact that where you live can determine how long you may live.”

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