The inflation rate in the UK has jumped to 3.5% in January which is bad news for many retirees and those looking to buy an annuity. The rise is being blamed on the increase in VAT and high petrol prices, but this will be no consolation to those who are effected by this rise. And those who are on fixed incomes such as pensioners are often hardest hit when inflation jumps.
The governor of the Bank of England has described this as a “short-term” rise, and with a target of 2% he will be hoping, like the rest of us, that this will indeed be the case. A spike in inflation will reignite interest in inflation-linked annuities, which have escalations inline with the RPI (Retail Price Index). If inflation continues to rise these can provide protection, however your starting income will be lower.
We have noted on this site before about the possible disadvantages of inflation-linked annuities, but with the latest inflation figures being as they are, and the fact that retirement periods are getting longer, the argument against level annuities grows ever stronger. Bear in mind that some insurers will charge a premium on inflation-linked annuities as they cannot forecast in advance how much they are likely to have to pay out. Whatever you decide with regard to inflation and annuities, ensure you do adequate research into the possible scenarios as once you have bought an annuity product you cannot change the terms.
