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Poor subsidising the rich in private pensions

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Mark Easton | 17:01 UK time, Tuesday, 23 September 2008

"Pensions reduced if you are middle class" thunders the Daily Telegraph this morning. But what the story actually does is remind us how the poor continue to subsidise the rich in their private pensions.

The front-page splash is prompted by Norwich Union's decision to join Prudential and Legal & General in tailoring pension payouts to your post code. The annual value of the annuity a pensioner can buy at retirement will be lower depending on where you live.

The Telegraph puts it this way: "People in middle class areas such as Surrey, Sussex and Buckinghamshire will receive up to £230 a year less each year than those in parts of Manchester or Glasgow."

PensionersWell, this is only true if you assume a pension pot of £100,000. However, not many people in Easterhouse or Moss Side can afford a private pension like that - if at all. The national average private pension pot is actually about £30,000, a figure that does not take account of the millions of people who rely on state or occupational pensions and whose private pot is zero.

But let's follow through the logic of the Telegraph argument. If you live in a deprived part of Glasgow you would get a guaranteed annual payment of £7,818. However, pensioners in Kensington in London would get only £7,590 a year from the same £100,000 pot, "a full £228 less" as the paper helpfully points out.

The Norwich and Union has done this because they are in the business of risk, not social engineering. The fact is that on average people in Kensington live longer than people in central Glasgow. A lot longer.

The table from the ONS paper (pdf link) on the subject shows how long a man is expected to live after their 65th birthday in different areas.

Local areas in the UK with the highest and lowest male life expectancy at age 65, 2004-06
RankLocal areaCountry/English Government Office RegionLife expectancy at age 65 (years)
Highest Life expectancy at age 65
1Kensington and ChelseaLondon22.0
2Crawley South East20.3
4RutlandEast Midlands19.9
5East DorsetSouth West19.4
6West SomersetSouth West19.3
7ChristchurchSouth West19.3
8South ShropshireWest Midlands19.2
9LewesSouth East19.1
10GuildfordSouth East18.9
Lowest Life expectancy at age 65
432Glasgow CityScotland13.8
430North LanarkshireScotland14.9
429West DunbartonshireScotland14.9
427KnowsleyNorth West15.3
426ManchesterNorth West15.3
425LiverpoolNorth West15.3
424HartlepoolNorth East15.4
423Cannock ChaseWest Midlands15.4

You can see that a male pensioner in Glasgow is likely to get another 13.8 years while the pensioner in Kensington will probably be around for a further 22 years.

The arithmetic is telling. The average Kensington policy-holder will get £166,980 from their pension pot across a lifetime. The equivalent in Glasgow will get £107,888 - barely what they put in.

Far from the rich subsidising the poor, it is still the other way around - despite the Norwich Union's claims that their motivation is to make the situation fairer. "It is currently unfair because people living in poor postcodes are, in effect, funding those that live longer and live in rich postcodes", said Scott Brown of Norwich Union.

I suspect this has nothing to do with fairness and everything to do with business. Coincidentally, postcodes were first introduced in Norwich in 1959 to improve the postal system, but increasingly insurers have been using them to calculate your premium.

Your buildings insurance is largely dictated by your code which will be used to estimate the risk of flooding and subsidence. Your contents insurance will reflect the crime in your post-code. (Taken together, this apparently makes West Norwood in South London the most expensive area for home insurance in the whole of the UK, thanks to an above-average risk of burglary, flooding and subsidence).

Your postcode will have a bearing on your car insurance - according to one survey the cheapest rates are found in Dundee and the most expensive in East London.

Life insurance policies are likely to be cheaper in areas where people live longer.

Until recently it was the first three digits of your postcode that held the key to your premium but sophisticated 'spatial data' means insurance firms now have an interest in the second half to find out really detailed information.

But people are not being targeted for being middle class or poor, feckless or greedy. Financial services are interested in cold numbers and the products they sell are designed to maximise profit, not change society.


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