Saving enough to generate a decent retirement income is already hard enough for those not in the dwindling pool of lucky people – civil servants mostly – covered by a final salary pension scheme. Most of us have to save as much as possible and cross our fingers that when we retire our lump sum is big enough and annuity rates (the annual payment you have to buy with said lump sum) are high enough that we can afford to turn the heating on occasionally.
And your hopes of a comfortable retirement may “just have been dealt a new blow”, says Thisismoney.co.uk. Legal & General and Hargreaves Lansdown have suggested that it would be fairer to vary the size of the annuity paid according to where you live. That’s because those who live in pleasant, leafy areas tend to outlive those in poorer ones. For example, a man living in Kensington and Chelsea can expect to celebrate his 80th birthday, but for his counterpart in Glasgow, this drops to 69. Even within Glasgow, life expectancy ranges from 63 in the worst-off areas to 76 in the best-off. Current proposals would see the pension income paid each year adjusted by up to 1% on this basis. Just as smokers get higher annuities because they tend to die earlier, those who live in nicer areas will be paid less, on the basis that the annuity provider will be paying out for longer.
Legal & General has labelled the post-code factor “a natural evolution”. The group points out that location influences what you pay for car and home insurance, so why not the size of your pension too? But however logical the argument, all this means that your pension payout could be “slashed”, says the Daily Mail, amid a new “postcode lottery”. Is that true?
Probably not. As Stuart Watson says on Yahoo, given the maximum adjustment proposed is 1% for differences of up to ten years in life expectancy, “the middle classes can breathe easy for the time being”. Rather than “moving to a slum” there are plenty of other ways to boost your annuity income. Always shop around for the best rate instead of settling for the firm who managed your pension up to retirement – this could make a difference of “up to 15%”.
Also remember that while pensions carry attractive tax relief on the way in (40% for higher-rate taxpayers), the annuity income is taxed. With Individual Savings Accounts, the money going in has already been taxed, but you don’t pay tax (at least, not as much) on the way out. You can put up to £7,000 a year (£7,200 from next April) into Isas, which also have the advantage of being accessible – you may need your money before you turn 55. And there’s no need to buy an annuity, so you won’t be penalised for your standard of living.