Increase in Payment (Escalation)

An escalating annuity is one that increases each year. Choosing this option will result in a lower starting income than having a level annuity. The greater the escalation, the lower the initial income. It is therefore important to balance carefully what you need now against what you are likely to need in the future, and also take into account the age to which you expect to live, based on your health and your family’s history of longevity.

The graph above shows the income payments that might be payable to an individual aged 60 years, based on either a level income or income escalating at 2.5% per annum.

Please note that if you opt for level income, your annuity payments will provide NO protection from inflation.

You can choose to have your annuity linked to the RPI (Retail Price Index), in which case your income will change in line with inflation. Please note that with RPI annuities your income will decrease if there is deflation. Alternatively, you can opt for a fixed percentage of escalation, of usually between 0% and 8.5% per annum. Escalation is valuable, but expensive to provide due to the future levels of income payable.

Indicative cost Comparison

Figures based on male aged 65, single life no guarantee period and payable annually in advance. Source: The Annuity Bureau – July 2010

If you have a sizeable pension fund and or can afford to take some investment risk, you should also consider the alternatives to conventional annuities. These offer the potential to keep pace with and even surpass inflation without sacrificing initial income. But, they don’t have the same solid guarantees.