When choosing your annuity, you will need to decide whether to have a level or increasing (escalating) income.
An escalating annuity option pays you an increasing income each year either by:
An escalating annuity will pay you a lot less at the start than a level annuity. However, your income will increase every year and could eventually outstrip the level annuity – but only if you live long enough.
It will take quite a few years for an escalating annuity to 'catch up' with a level annuity, and a good few years more before you will have received as much income. Maybe as many as 20 years.
The advantage of an inflation linked annuity is that your income will maintain the same spending power.
An annuity that increases by a set amount will struggle to maintain spending power, if the rate of inflation is higher than the rate it increases by.
For example, if your annuity increases by a set amount of 3% per year, and inflation is higher at 4.5% your annuity will actually lose spending power.
On the flipside, if inflation is less than your set increase of 3% per year, your annuity income will actually grow in terms of spending power.
Find out whether an escalating annuity will pay you a better income in retirement by comparing Annuity Rates
Speaking to an independent financial adviser will help you to decide if an escalating annuity is the right option for your personal circumstances.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.