As you might expect from it’s name, an inflation proof annuity protects annuitants against the rise of inflation. Although you can build in annual increments under a standard or conventional annuity, these are not guaranteed to match the level of inflation. An inflation-proof annuity will keep its value throughout the lifetime of the annuity as it is linked to the RPI (Retail Prices Index). Any annual rises in inflation will be matched by a rise in your annual income.
Main Advantages
- Will provide an income for the rest of your life whilst protecting your purchasing power.
- Protects against high inflation and price rises.
Main Disadvantages
- Initial income is lower when compared to a conventional annuity.
- Rates will be based on a forecast of future inflation.
- Unless you take out a guarantee against zero inflation, if the inflation rate were to hit 0% then your income would go down.
- RPI is not always the best barometer of pensioner income levels.
Life expectancy is getting longer all the time and even small rises inflation could harm you income. By tagging your income to the RPI, you can guarantee that your pension income will keep in line with inflation. You can protect against deflation or no inflation, but this will mean a lower starting income.
