Inflation-linked annuities generate the lowest total income over a retiree's lifetime when compared to all other annuity options, according to the latest research by MGM Advantage.
Annuities that are linked to inflation have been designed to protect retirement income from the effects of rising inflation. They offer a lower starting income when compared to conventional annuities, but over time the amount generated increases in line with Retail Prices Index (RPI) inflation.
For example, if buying an inflation-linked annuity with a £100,000 pension pot, retirees can expect to receive a starting income of £3,331 per year, compared to a conventional annuity's £5,743 per year, according to MGM Advantage.
Yet in year 22, the annual amount paid out from an inflation-linked annuity, according to the current RPI rate, will have grown to £6,197, while the conventional annuity will have remained at £5,743.
When analysing the total income generated by both annuity incomes, however, MGM Advantage found that over a 22-year typical retirement, a conventional annuity paid out 24% more than an inflation-linked option, at £126,346 compared to £101,718.
The research has highlighted the importance of considering all options when purchasing an annuity.
So although an inflation-linked annuity generates less total income, by choosing this option retirees will be protecting their income from being eroded by inflation, as they'll be receiving far more income in their later years when compared to the conventional counterpart.
Those approaching retirement should also always exercise their right to shop around for the best annuity rate before accepting the one their current pension provider is offering them - the difference in annuity rates between providers can be as much as 30%!
Remember, choosing an annuity is one of the most important financial decisions you'll ever make, so it's always a good idea to seek independent financial advice.
You could increase your income in retirement by up to 40% depending on your medical situation by calling our annuity service on 01737 233 435
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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