Inflation Proofed Annuities
Inflation proofing or to use the jargon "escalation" means buying an annuity which will increase each year. You can opt for it to increase by a fixed percentage, such as 3% per year or the rate of inflation - very often referred to as RPI. There are some companies that will not quote for PRI linked annuities, but instead will quote LPI (Limited Price Index - Inflation with a cap). This usually means that they will provide inflation proofed increases, subject to a 5% annual maximum.
The main disadvantage with any sort of escalation is that it means that you start off with a lower level income. Typically, if you opt for an RPI escalating annuity you will end up with a third less income than an annuity which does not increase - a level or fixed annuity.
If you assume that inflation was 3% p.a. it would take 13 years until an increasing annuity pays the same income each year as a level annuity, and 19 years until the escalating annuity has paid out more money in total.
For most people over the age of 60, taking out a level annuity, ie: an annuity which does not increase, is the best option. Since the "catch up” time is so long. However, if you have worries that inflation is going to increase or you are in your 50's, then it is worth considering an annuity which increases.
As an alternative to inflation proofing, it is worth considering an invested annuity, in particular a with-profits annuity. With this type of annuity, you can take an initial level of income which would be the same as a level annuity. If the performance of the fund is better than assumed then the income will increase. Click here to find out more about investment linked annuities and with-profits annuities.
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just want to chat through some details about your pension then please feel free to contact us, without obligation. Either contact us online or call 0800 011 2713.