How it works
An increasing annuity does exactly what it says on the tin - it’s an annuity that increases your income year-on-year. You might choose one of these annuities simply because you feel you’ll spend more later on in your retirement, to fit in with your other retirement income plans, or to keep your spending power in line with the economy.
There are two main options:
- RPI-linked Annuities - Your income is linked to the rate of inflation according to the Retail Prices Index (RPI). This means your income will always stay in line with the cost of living in the UK. However, with the low-level of inflation we’ve seen over the last few years, your annuity may not rise for some time. The starting income for an increasing annuity is usually lower than with other annuity products, so this could have a negative impact on your finances in the short term.
- Escalating Annuities - With an escalating annuity, your income will increase at an agreed rate each year, usually around 3-5%. You’re receiving a guaranteed yearly payrise and because you know the amount up front, you have the opportunity to plan your spending around it. But if inflation picks up, it could rise above the rate your annuity increases at, meaning you’d have less income in real terms.
What’s the catch?
An increasing annuity might sound like common sense, but there are a few things to consider. These policies start at a lower rate than level annuities and can take a while to catch up.
Have a think about how you expect to live in retirement. Decide whether it’s more important for you to have a higher income later in life, or if you’d prefer more cash at the beginning of your retirement.
If you’re still unsure whether an increasing annuity is right for you, we can put you in touch with one of the retirement specialists we work with for a free initial consultation. Get tailored advice and quotes with no obligation to buy.