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Index-Linked Annuity Rates

Last updated: 09/02/2014

What Are Index-Linked Annuity Rates?

Index-linked annuity rates provide an annuity income that increases each year.

When a retiree buys an annuity at retirement they can choose whether to receive an income that stays the same each year until they die or one that increases each year.

Where they choose to receive an increasing (the official term is ‘escalating’) annuity income, they can opt for a fixed annual increase (example, 3%) or an ‘index-linked’ annual increase.

The ‘index-linked’ part usually refers to the Retail Price Index (RPI), which is one of the government’s measures of inflation.

Choosing an index-linked annuity rate / income is the common method by which a retiree can attempt to maintain the future buying power of their annuity income (i.e. try to create an inflation-proof annuity income).

ARTICLE SECTIONS:
INDEX-LINKED ANNUITY RATE EXAMPLES
EXAMPLES OF INDEX-LINKED ANNUITY INCOME VS. LEVEL / FIXED ANNUITY INCOME
GETTING INDEX-LINKED ANNUITY RATES ADVICE & QUOTES

The table below gives examples of index-linked annuity rates for both single life and joint life annuities. We have also included corresponding level / fixed annuity rates so that you can compare the difference.

SINGLE LIFE ANNUITY EXAMPLES
(INCOME INCREASING BY RPI)
FEMALE AGED INITIAL ANNUAL ANNUITY INCOME
55
£ 2,352.00
60
£ 2,904.00
65
£ 3,480.00
70
£ 4,104.00
MALE AGED INITIAL ANNUAL ANNUITY INCOME
55
£ 2,352.00
60
£ 2,904.00
65
£ 3,480.00
70
£ 4,104.00
SINGLE LIFE ANNUITY EXAMPLES
(INCOME FIXED / LEVEL)
FEMALE AGED ANNUAL ANNUITY INCOME
55
£ 4,860.00
60
£ 5,472.00
65
£ 6,108.00
70
£ 6,888.00
MALE AGED ANNUAL ANNUITY INCOME
55
£ 4,860.00
60
£ 5,472.00
65
£ 6,108.00
70
£ 6,888.00
JOINT LIFE ANNUITY EXAMPLES - 50% SPOUSE'S PENSION
MALE AGED /
FEMALE AGED
INITIAL ANNUAL ANNUITY INCOME
(INCOME INCREASING BY RPI)
ANNUAL ANNUITY INCOME
(INCOME FIXED / LEVEL)
M 55 / F 50
£2,064.00
£ 4,596.00
M 60 / F 55
£2,520.00
£ 5,100.00
M 65 / F 60
£3,024.00
£ 5,604.00
M 70 / F 65
£3,456.00
£ 6,192.00

The above figures are for illustrative purposes only. They are based on standard annuity rates for a conventional Lifetime Annuity with no guaranteed period and the income paid in arrears without proportion bought with a pension pot of £100,000. A Wokingham RG40 postcode was used for quotation purposes. The income figures shown are gross.
Annuity rates checked: 09/02/2014. Source: Money Advice Service Annuity Comparison Tables

One thing that should be obvious from the above figures is that, for the index-linked annuity rate examples, the starting incomes are significantly lower when compared to the fixed / level annuity rate examples.

Depending on how high inflation is in the future, it could take many years for an annuity paying an income that increases by RPI each year to catch up to one that pays a fixed / level income.


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The table below shows an example of how long it could take for the annual income paid by an annuity with an income that increases by RPI each year to catch up to one that pays a fixed / level income.

As none of us know how high inflation will be in the future, the example includes three different rates of inflation. The eventual inflation rate could obviously be higher or lower than those shown in the example.

INITIAL INDEX-LINKED ANNUITY INCOME OF £ 3,480.00
LEVEL / FIXED ANNUITY INCOME OF £ 6,108.00

ASSUMED
RPI RATE
TIME TAKEN FOR INDEX-LINKED ANNUITY INCOME PAID EACH YEAR TO CATCH UP WITH LEVEL / FIXED ANNUITY INCOME
6%
10 Years
4%
15 Years
2%
29 Years

The next table now shows how long it could take for the total income paid by an annuity with an income that increases by RPI each year to catch up to one that pays a fixed / level income.

INITIAL INDEX-LINKED ANNUITY INCOME OF £ 3,480.00
LEVEL / FIXED ANNUITY INCOME OF £ 6,108.00

ASSUMED
RPI RATE
TIME TAKEN FOR TOTAL INDEX-LINKED ANNUITY INCOME PAID TO CATCH UP WITH TOTAL LEVEL / FIXED ANNUITY INCOME PAID
6% 19 Years
4% 28 Years
2% 54 Years

You can see that it takes a lot longer for the total income received from an index-linked annuity to catch up with a level / fixed annuity however, that is not the end of the comparison.

We finally need to take account of the respective buying power of the annuity income received from each type of annuity over time.

The table below takes the figures from the previous table and adjusts them to take account of the actual buying power of the income in today’s terms.

INITIAL INDEX-LINKED ANNUITY INCOME OF £ 3,480.00
LEVEL / FIXED ANNUITY INCOME OF £ 6,108.00

ASSUMED
RPI INFLATION RATE
TIME TAKEN FOR TOTAL INDEX-LINKED ANNUITY INCOME PAID TO CATCH UP WITHTOTAL LEVEL / FIXED ANNUITY INCOME (ADJUSTED TO TAKE ACCOUNT OF BUYING POWER IN TODAY'S TERMS)
6%
23 Years
4%
34 Years
2%
65 Years

You can see from this table that the breakeven point is pushed even further into the future.


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The decision about whether a retiree should opt for index-linked annuity rates and an index-linked annuity income is a difficult one to make and getting annuity advice can help.

Getting annuity advice is important because there are many factors to consider before buying an annuity with/without index-linked annuity rates.

A retiree needs to decide what the future inflation rate is going to be and whether they are likely to live long enough to actually gain any benefit over the longer term.

Depending on their life expectancy and the actual inflation rate in the future, if they do choose to receive an income that increases by inflation each year, there is a real danger that they could die before the increasing income ever catches up with the income that they would have received from an annuity paying a level / fixed income.

However, what happens if they defy the odds and live to a ripe old age and the buying power of their annuity income is significantly reduced over time? Would they have enough income from other sources to pay their way?

Should a retiree take the higher level / fixed annuity income now and take a ‘live for today’ attitude or take the safe route and be less well off now but be potentially safer over the longer term?

An annuity adviser can obtain a range of annuity quotes so that a retiree can make an informed decision about their annuity choices.

This is important because, once bought, a conventional Lifetime Annuity cannot usually be changed. The options that are selected at outset will remain with the retiree for the reminder of their life.

If you are unsure about which course of action to take, why not get index-linked annuity advice and quotes from annuity adviser before you commit yourself to an irreversible decision?


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