An escalating annuity (whether that’s a single or joint life annuity) will provide an increase in your annual income which will help protect against the impact of rising inflation. This contrasts with a level annuity, which pays you the same income level every year.
You can choose the amount by which your annuity income is escalated each year, so for example this could be 3%, 4% or 5%. However it must be recognised that your starting level of income will be significantly lower with an escalating annuity. So for example if you were to choose an annuity with a 3% escalation, it would take 14 years to catch up with a level annuity. And it would take up to 26 years before the total income paid out from the 3% escalating annuity exceeded the total income from a level annuity. However it should be understood that an escalating annuity is really just a form of deferred income. There is no extra money, just remember that your starting income will be lower as money saved for annual increases.
If you don’t want to set the exact amount by which you wish to increase your income you could link your annuity income to inflation via an index-linked annuity. This type of annuity will be linked to the RPI and so will peg your annuity income to inflationary increases. Comparisons on the benefits of an escalating annuity and an index linked-annuity are made using the fixed interest market and market interest rates.
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