Effect of Inflation on Annuities

14th February 2012

When it comes to thinking about the future an annuity is one thing that will be a major consideration in our lives. Putting money aside for the future is something that most people starting thinking about from a young age, the problem is that the value of money today could have changed by the time we retire and could change again during our retirement.

Inflation is rife in the UK at the moment and every year items are becoming increasingly expensive and wages are going up. The problem is that once you hit retirement you are no longer receiving a wage you are instead receiving an annuity and a regular annuity does not go up or increase with inflation. This means that essentially each year the value of your annuity is decreasing while the cost of everything around you continues to increase.

What is Inflation and how can it affect my Annuity?

Large amounts of inflation can cause your annuity to devalue, although you will still be receiving the same amount of money it won’t be worth what it used to be worth and you won’t be able to purchase with it what you once could. The affect that it will have on your annuity will usually depend on how long you live for after you take your annuity out. If you live for 20 or 30 years after your annuity has been taken out then you could find that your annuity as much as halves in value over that period of time.

What can I do to protect my Annuity from Inflation?

When it comes to protecting your annuity from inflation there are a number of options that you can take, but one of the most common is to actually take out an inflation protected annuity. In general there are two main types of these:

  • Escalating annuities which offer you a fixed rate of increased income each year, this is usually done at a set rate which is designed to combat inflation
  • RPI-linked annuities which allows your annuity income to work around the current Retail Prices Index. This means that if inflation was to increase your annuity income would also increase. On the flip side if inflation were to decrease then your annuity could also decrease.
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