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Last Updated: Friday, 31 August 2007, 14:23 GMT 15:23 UK
Postcodes used in pension sums
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One of the UK's biggest private pension providers, insurer Legal & General (L&G), is starting to use postcodes to price its annuities.

Annuities are policies that provide an income in retirement and are usually bought with the proceeds of private pension plans.

L&G said someone's postcode was a good indicator of how long they will live.

It is using this information in a pilot project alongside data about a customer's gender, age and health.

"Postcodes are already accepted for risk profiling in other areas of insurance, such as motor and household," said Tom McPhail, from financial advisers Hargreaves Lansdown.

Longevity

The general principle is that the longer you are expected to live, the smaller your annual pension will be, for any particular sum of money used to buy the annuity.

Thus a non-smoking younger woman in good health will, because she is expected to live much longer, get a much smaller annual income than an older man in bad health who has smoked all his adult life.

We believe that postcodes are a reliable rating factor
Simon Gadd, Legal & General

This is even though they may put down exactly the same amount of money at the start of the annuity.

"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," said Simon Gadd, head of the Legal & General's annuity business.

"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," he said.

Postcode districts

Figures supplied by the L&G suggest that people who are identical in all other respects may get an extra 1% added to their income each year if they live in a postcode area where people's average life expectancy is low.

The data about postcode areas has been drawn from official sources such as the census and the Office for National Statistics statistics on houses, incomes and marital status.

L&G is also using data from its own customer databank going back over many years.

This has been synthesised into a weighting for every postcode district in the UK.

The plan is that it will be used to improve the annuities offered to people in the areas of the country where life expectancy is reckoned to be the lowest.

But customers elsewhere will not have their annuity offers reduced, said a spokesman.

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