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To protect your income from rising prices, you can choose an annuity
that is designed to increase each year. There are two main choices:
1. Escalating annuities - your income is guaranteed to increase at a fixed
rate each year, commonly 3% or 5%.
2. Inflation-linked annuities - your income is adjusted each year to
reflect changes in the Retail Prices Index (RPI) - the main measure of
inflation used by the government. So, if inflation is 3% one year, then
your income goes up 3%. If inflation is 10% next year then your income
goes up by 10%. However, your income is not guaranteed to increase each
year - if the RPI did not rise, nor would your income.
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With an
escalating annuity, the starting income is a lot lower than
you would get from a level annuity. For example, for a man
aged 65, the starting income from a 5% escalating annuity
might be two-thirds or less of the amount from a level
annuity. It could take more than 10 years for the escalating
income to catch up, and nearly 20 years before the total
that you would have received from the escalating annuity
exceeded the total from a level annuity. |
Our full advice report will produce a graph showing this in detail |
