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Do you want to protect your annuity payments against inflation?

Written by Retirement Line Updated: 1st March 2024

You can increase your annuity income over time to retain its buying power

Inflation eats into the real value of your annuity income. High inflation in particular can reduce what you can buy on a fixed income that has not risen to keep pace with inflation.

A solution is to arrange for your annuity income payments to increase each year.

You will find information about inflation-linked annuity protection below. For more information, please contact us to speak to one of our Annuity Specialists. They can discuss your situation and provide quotations from leading annuity providers to illustrate your options.

On this page:

  • Why is it important to consider inflation protection in retirement?

  • Do annuities increase with inflation

  • How does an inflation adjusted annuity work?

  • Pros and cons of annuities with inflation protection.

  • Is an inflation protected annuity right for you?

  • Make an informed annuity decision.

Why is it important to consider inflation protection in retirement?

For those of us in retirement, elevated inflation levels mean day-to-day prices going up when our pension income stays the same. This can have a real impact on our standard of living in later life and our enjoyment of retirement.

Whilst there is no crystal ball to see exactly how long we’ll live, today’s retirees are enjoying longer, healthier lives than our predecessors. As you could be in retirement for 30 years or perhaps even more, it’s important to consider the impact of inflation on your retirement income.

Despite the Bank of England’s target to keep inflation at 2%, inflation has seen food and energy bills soar in recent years. Levels peaked at 9.6% in October 2022, the highest seen in 40 years. 

Even if inflation does return to the Bank of England’s target of 2% and remains around that level for the whole of your retirement, it would still almost halve what you could afford to buy in 30 years’ time. For example, a £10,000 annual income today would have a buying power of just £5,520.71 in 30 years. 

Fortunately, if you choose an annuity, there are ways to help protect the value of your retirement income being eroded. 

Do annuities increase with inflation

An annuity converts pension savings into guaranteed retirement income. A standard annuity is set up so that payments stay the same year after year. But if inflation is a concern, you can choose an inflation protected annuity where your income increases each year.

How does an inflation adjusted annuity work? 

You have two options when it comes to protecting the buying power of your income with an escalating annuity:

Increase income in line with prices. To offset the effects of inflation, you can choose to increase your annuity income payments in line with the Retail Prices Index (RPI). Because this tracks the average change in certain goods or services bought in the UK, it protects the buying power of your annuity income. 

Increase income at a fixed percentage. If you wish, you can increase your annuity income payments by a fixed amount each year with a percentage escalating annuity – typically at 3% or 5% per annum. This could be helpful if you want to know exactly how much income you will get in the future.

Pros and cons of annuities with inflation protection

As with any financial product there are some pros and cons of an inflation adjusted annuity. 

The key benefit of an inflation protected annuity is that it will go some way to safeguarding your retirement income from the effect of future price increases. It will mean that your income could potentially have the same or similar buying power in the future as it does when you take out your annuity.

However, there is a drawback to annuities with inflation protection. When you begin to receive your retirement income, the amount you get will initially be lower than an annuity that pays the same amount each year. This could be an issue if you cannot afford to live on the starting income that you are offered with an inflation-linked annuity. 

Here are some examples to illustrate the difference between the starting income with inflation adjusted annuities and level annuities:

  Annual income from £100,000 used to buy an annuity  

 

  Annuity type

 

  Age 60

  Age 65

  Age 70

  Age 75

 

  Single life, level 

 

  £6,655.08 

  £7,405.44   

  £8,188.92    

  £9,378.96 

 

  Single life, escalating at 3%   

 

  £4,648.08   

  £5,287.80

  £6,051.00

  £7,689.12

 

  Extra income in year 1 with a level  
  annuity

 

  £2,007.00  

  £2,117.64

  £2,137.92

  £1,689.84

 

  Single life, level  

 

  £6,655.08   £7,405.44    £8,188.92     £9,378.96  

 

  Single life, escalating at RPI   

 

  £3,998.28  

  £4,636.20

  £5,484.12

  £7,133.52

 

  Extra income in year 1 with a level
  annuity  

 

  £2,656.80  

  £2,769.24

  £2,704.80

  £2,245.44

Note: The figures above are based on annuity rates at 01/03/2024 from Retirement Line’s in-house annuity quote system, which gathers quotes in real time from the UK’s leading annuity providers. Please see our annuity rates page for the latest figures.

Figures are based on single life conventional lifetime annuities for a male, using a Peterborough postcode (PE7 8JG), with the payment frequency set to monthly in arrears. ‘Age’ refers to the person’s age when the annuity is set up. You may be eligible for more income with an enhanced annuity.

Is an inflation protected annuity right for you? 

Remember that income from an annuity with inflation protection will increase over time. This could give you valuable protection against the damaging impact that inflation has on the buying power of our income. On the other hand, arranging annual increases in this way will lower the income you receive from the start of your annuity.

It is also worth considering how much income you will need as you grow older. You may feel that you will need less money in your eighties than you do in your sixties, for example, if you anticipate being less active. 

In that case, seeing the value of your income fall in real terms due to inflation may not be a concern. This isn’t true for everyone of course, and only you will know what type of lifestyle you anticipate through your retirement. 

We should also add that some of your other sources of retirement income may already include inflation protection. For example, the State Pension is currently guaranteed to rise in line with the higher of earnings, inflation (measured by increases in prices) and 2.5%. You may also have income from a ‘final salary’ pension scheme with some degree of inflation proofing.

To decide whether an inflation adjusted annuity is right for you, you will want to weigh up a number of factors. These include your overall retirement income, how much of it is inflation-proofed, and how you see your lifestyle changing over time. 

Make an informed annuity decision

One of our Annuity Specialists will be only too happy to provide you with a breakdown of the annuity figures so you can make an informed decision. They will also be able to compare the annuity rates from leading annuity providers, showing income levels with and without inflation-linked annuity protection.  

Call us on 0800 652 1316, request a call back or email info@retirementline.co.uk. Our UK-based team will be happy to provide the information you need to make a decision that’s right for you.

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