Escalating Annuities

5th March 2012

There are so many different options available to you when you start to look at annuities that it is worth shopping around to find the best type of annuity for your personal circumstances. When it comes to retirement inflation is a big consideration that many people often forget to think about, but it can have a major impact on your final annuity income. For this reason many people choose to take out an escalating annuity with the hopes of combatting rising inflation rates, while still receiving the same level of income, relative to the rates of that time.

How does an escalating annuity work?

Escalating annuities work by increasing your annuity income on a yearly basis, to match the inflation rate of the time. In general these are more expensive types of annuities and it may mean that your starting annuity income will be far lower than that of a traditional annuity. This will of course then be offset as your annuity continues to grow over time whereas a traditional annuity would continue to pay the same amount of income, regardless of the inflation rate of that time.

What affect can inflation have on my annuity?

If you choose to take out an annuity that does not take into account inflation then you need to keep in mind that your money may not be worth as much as it currently is in the future. For example £1000 may buy certain items today,  but in 10 years after inflation it may be able to buy only half of those items and as such, you may need to consider how much annuity income you are going to receive and whether it will be enough to deal with escalating inflation rates.

Why would I consider an escalating annuity?

If you are concerned about the effect that inflation could potentially have on your annuity then you may consider taking out an escalating annuity which will provide you an additional income each year, keeping in line with inflation rates. Although for many people this may mean starting off with a lower annuity income after several years have passed this income rate can quickly overtake that of a traditional annuity income and continue to grow, making it more of a long term investment.

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