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Insurer trials postcode annuities boost

UK - A new scheme is being piloted in the UK which could see pensions annuities in part calculated according to where an individual lives.

Life insurer Legal & General is trialling a scheme, with the help of financial adviser firm Hargreaves Lansdown, which could give people with lower life expectancies slightly higher annuity income depending on their postcode.

Risk assessments to determine income payments at retirement will still require the usual information about a person's age, gender, whether they smoke and medical history in some cases, but L&G will now ask for a person's postcode as existing data suggests people living in certain regions of the UK are likely to living shorter lives and should therefore receive "a modest enhancement" on the payouts gained from their defined contribution retirement pot.

Officials involved in the pilot say any increase to people meeting the postcode enhancement criteria does not mean those living in areas where people are thought to live longer, such as London's wealthy Borough of Kensington and Chelsea, will receive lower  annuity payouts.

That said, it is understood any long-term calculation adjustments unlocked by better statistical analysis could eventually have a knock-on effect anyway as improved understanding of client longevity is likely to mean annuity rates may eventually be adjusted for people expected to live longer, healthier lives.

Finding ways to improve eventual income received from a person's pension is becoming an increasingly important subject in Europe as many people believe linking annuities to bond rates does not necessarily reflect a good return on the monies built up through defined contribution pension schemes.

EFAMA, the European Fund and Asset Management Association, for example, recently announced research is being conducted by Professor Bauer at Frankfurt University into the pension payout phase and income at retirement, to see whether alternatives to traditional annuities can be developed.

Similarly, new hybrid annuity products have hit the UK market in recent months from US annuity firms Hartford and Met Life, which combine traditional annuities with income drawdown and continued investment strategies but allow the holder to protect against longevity risk as well as guarantee income will not fall below a certain level.

Other countries in Eastern Europe, have yet to develop annuity or income at retirement systems, for example, as the retirement savings regimes are still young have yet to hand out income payments.

Tom McPhail, head of pensions research at Hargreaves Lansdown - and involved in the L&G pilot - anticipates more firms will continue to find new ways of improving the income people receive at retirement through long-term savings and their subsequent living standards.

"Increasingly, what we are going to see is more segmentation of the annuity market, so people who have poor life expectancies should see enhanced returns," said McPhail.

"In the overall scheme of things, there has to be some counterbalance in the form of people taking alternatives [to annuities]. And what we are likely to see is people with higher life expectancy are likely to annuitise later, look to invested annuities, drawdown or alternatively secured pensions. There is a lot of experimentation by [companies] seeking to add value," he added.

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