Escalation

Inflation can affect your client's retirement income over time. It can mean that budgeting to live on a fixed income becomes one of the biggest financial challenges your client faces.

Most guaranteed income for life solutions (GIfL), provided by a pension annuity, offer clients the option to automatically increase the income they receive each year by either a set percentage (usually 3% or 5%) or by linking to a measure of inflation such as the Retail Prices Index. These options will reduce the income initially received, and increase it in the future.

Points to consider

• Future increases in the cost of living may reduce the real value of annuity income.
• Inflation of 5.5% per year (the average inflation rate over the 60 years leading up to the end of 2019*) could reduce the real value of income by over 50% in just 13 years.
• In times of deflation some index linked annuities can decrease, while others have built in 'floors' meaning annuity income will never fall.

*Taken from Bank of England Inflation Calculator which uses the Office for National Statistics (ONS) ‘Composite Price Index’.