Pru’s move, which had been tipped by Money Marketing in June, sees the company join Legal & General, which already calculates rates on this basis, and Norwich Union, which is moving to the method in the autumn. The three providers accounted for over 55 per cent of the annuity market in 2007.
Aegon says it has no immediate plans to adopt this pricing model but is “watching what competitors are doing closely”.
Standard Life says it is monitoring the market closely but has no current plans to adopt postcode pricing.
Hargreaves Lansdown pensions analyst Nigel Callaghan believes other insurers will be forced to follow or face a huge commercial risk of having too many healthy policyholders on their annuity books.
He says: “The early entrants are likely to pick the unhealthy lives first, dramatically altering the pool for the remaining providers.”
Callaghan also considers that as annuity pricing becomes less competitive for people in affluent districts, these people will become less likely to opt for an annuity and more likely to take drawdown or other products.
Pru is to introduce lifestyle pricing as an additional risk factor from mid-August and will apply it to guaranteed conventional annuities.
It says the new pricing will reduce the cross-subsidy of payments from people who live shorter lives to those that live longer.
This could mean a 5 per cent increase to an individual’s annuity if they live in a less affluent neighbourhood, says the company.
Prudential head of annuity development Athole Smith says: “It is part of an evolution in the market that will see pricing become more accurate in reflecting the risks being underwritten.”