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 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 5.4% per year (the average inflation rate over the last 60 years) could reduce the real value of income by over 50% in just 14 years.
  • In times of deflation some index linked annuities can decrease, while others have built in 'floors' meaning annuity income will never fall.