PENSION savers who live in wealthy neighbourhoods could lose thousands of pounds of retirement income after a move by one of the country’s biggest insurers.

Prudential has joined Norwich Union and Legal & General in calculating annuity rates according to where you live, because people in affluent areas tend to live longer. Advisers say that Prudential has gone a step further than its rivals with potentially bigger cuts to income.

Retirees with a postcode that places them in an affluent area such as Kensington or Wandsworth in west London, Roger-stone near Newport, or Saffron Walden in Essex are likely to see their incomes drop by up to an estimated 5%.

Most people buy an annuity – which pays a guaranteed income for life – with the bulk of their pension fund, taking the rest as tax-free cash. You can delay the purchase, but only until you are 75.

Prudential and the other insurers, which between them accounted for 55% of the annuity market last year, claim the new approach is fairer since wealthier people tend to live longer. They should therefore draw a lower income from the annuity “pool” than those with a lower life expectancy.

They already take age, gender and factors such as smoking into account when setting a rate for retirement income. By adding postcodes, they are following the example of car and home insurers.

Legal & General was the first to announce a change last September. When Norwich Union made its announcement in June, it admitted up to a third of its customers would be worse off, and forecast a difference of up to 2% in the annuity rates. A reduction at that level could cut the annual income of someone with an average Norwich Union £30,000 fund by about £50.

Prudential has gone further still, though. People living in less affluent neighbourhoods will see up to a 5% increase in their annuity. A Pru spokesman said: “We are pricing annuities more accurately to reflect the risks being underwritten. Where someone lives will become an additional rating factor to age, gender and fund size as there are known links between dietary habits, exercise and wealth, and where you reside.”

According to its figures, a single man of 60 living in Kensington would receive £6,721 a year from a £100,000 fund under the new regime, compared with an annual payment of £7,181 for a man in the same circumstances but living in Dundee and a current rate of £6,881.

This means that the Dundee resident will enjoy a 4% uplift, while the man living in Kensington would receive 2% less as a result of the change.

On a £50,000 pension fund, the man from Dundee would receive £3,587 a year, up from £3,421 now – assuming the same annuity conditions. The Kensington saver would get just £3,342, Prudential said.

Adviser Hargreaves Lansdown found that, based on current annuity rates, a 65-year-old single man living in Poole in Dorset would get £15,932 less over 21 years than he would if he lived in Dundee. For the same person, but on a £50,000 fund, the difference would be £7,904.

Nigel Callaghan of Hargreaves Lansdown said: “Prudential’s announcement has pushed the market past a tipping point, with the increased use of personalised annuity rates such as postcode and enhanced annuities now becoming an everyday occurrence.”

He predicted that this will lead to healthy, wealthy pension savers increasingly using tools such as income drawdown to avoid being penalised. Drawdown schemes allow you to take an income of up to 120% of that you would receive from an annuity, while the rest of your fund remains invested. If your investments do well, you can draw an income equal to or even higher than you would have received from an annuity.

However, if markets fall, investors can be forced to take a cut in income because their fund starts to shrink, making it harder to keep up the income payments without further depleting the amount invested.

It is worth remembering that the level of investment returns needed to meet this target can be quite demanding even when stock markets are doing well.

Other ways for wealthier retirees to max-imise their income include shopping round for the best rate using the open market option, rather than simply taking their pension provider’s annuity, to get the best possible value from their fund.

This option is currently used by less than 40% of retiring investors. However, Hargreaves Lansdown said that due to this retiring investors are losing out on £1.25 billion of pension benefits every year.

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