Annuity payments can be level or increasing

A level annuity pays the highest income at the start and does not increase in the future. Whereas an escalating annuity starts at a lower level but increases each year. The increases can be constant, e.g. 3% each year or the increases can be linked to changes in the Retail Price Index, more commonly known as index linking.

Comparing the options

It is only natural to want the highest income but you shouldn't forget the effects of inflation. An increasing annuity may start lower but it will pay out more income in the future. Remember "Inflation is like sin, every Government denounces it, but they all practice it".

£ 100,000 purchase, male aged 65, female aged 65, guaranteed 5 years.

How long does it take for a level annuity to catch up with escalation?

The chart below compares the future payments from a level annuity compared to an annuity increasing at 3% compound per annum and an RPI annuity. Future inflation is assumed to be 4% per annum.

£ 100,000 purchase, male aged 65, guaranteed 5 years.