When someone uses the phrase “postcode lottery,” most people think it refers to access to healthcare. But your address affects your pension in more ways than you think.
As a member of a UK private pension scheme, you are obliged to buy an annuity by your 75th birthday. Some people leave it until the 11th hour, hoping that the markets will pick up and deliver a magical solution. Others will put the arrangements in place years before, to get the whole process out of the way.
Investors do not have to just accept the annuity rate their current scheme offers, yet only just over a third of people in this position shop around for a better deal. This is where the postcode lottery element comes into the equation. If you live in an area with a higher life expectancy like Surrey, you will receive a worse annuity rate than an inhabitant of an area with a lower projected life expectancy, like Glasgow. This may seem unfair, but it is based on a carefully constructed projection of how much you will cost the pension scheme in payments.
Ironically, this is one area where being an overweight smoker and having a sedentary lifestyle could be worth a few quid. As someone with a lower life expectancy, you would statistically have a shorter life expectancy and therefore be claiming your pension for fewer years. In this situation, pension schemes pay out higher annuities.
Being a woman will also mean that you get a worse annuity rate than your male contemporaries, as you are likely to live for longer than them.
What can you do about this? The danger with leaving an annuity purchase to the last minute is that you will be at the mercy of the markets at that time. However, the longer you leave it, the fewer years you will have left as an annuitant, and the better rate you can get.
But the simple answer is that you have to shop around to get the best deal, and make sure that you get a deal that suits your circumstances. If you are considering transferring your UK pension abroad into a QROPS, you will need to act quickly. Once you have bought an annuity in the UK, you will be stuck with it.
