Protecting an annuity from inflation

11th January 2012

When it comes to choosing an annuity, we want to ensure that it gives us a decent income for the rest of our lives. Unfortunately in the current economic climate, inflation means that what we might now consider to be a great deal of money, might in fact be worth only half of that or even less in the future.

Although annuity incomes may seem to reasonable now, in many situations these are incomes that the annuitant could be receiving for the next 30 years, and over this period of time inflation will have drastically increased meaning that the once great annuity income may now leave the annuitant struggling to cover even the most basic of expenses.

How do inflation protected annuities work?

When it comes to protecting your annuity against inflation there are a number of options available to you. One of the most popular choices is to take out an income increasing annuity which increases over time in an effort to keep up with the market trends and inflation. Some of the annuity options that may be available to you include:

  • RPI-linked annuities – this can be seen as a risk annuity as it is based on the Retail Prices Index (RPI) – the index that the Government uses to measure inflation. Your annuity income is directly tied in to changes in the RPI index, so if inflation increases by a certain amount then your income will also increase by that amount. The downside is that if inflation falls then your income will follow suit
  • Escalating annuities – these annuities offer you a guaranteed increase to your income each year. These rates of increase are generally fixed at up to 5%.

What benefits can they offer me?

In general annuities that are protected against inflation are an income for your future, but in many situations they can leave you with lower annuity income rates that you would get elsewhere. The increase in income can be incredibly valuable if you do hold onto your annuity for a long period of time as over 20 or 30 years we can see a significant increase in inflation, and it leaves you with peace of mind that you won’t be left short if steep rises in inflation were to occur.

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