This is an unexpected tale, and an unfortunate one. There are thousands of pensioners out there who could face an unwelcome cut in their annuity incomes next year after taking out expensive annuity products.
These people took out so-called index-linked annuities, where your annuity income rises in line with the retail prices index (RPI), in an attempt to protect themselves against general inflation and the rising costs of living in retirement. The annuity Income payable is generally based on the inflation rate three months prior to purchase.
Therefore, those who took out one of these annuity contracts last month will reap the rewards of a spike in RPI to 5% in July, but they could well see a fall in their income next year, despite paying a premium for index-linking.
RPI fell to 4.2% last month, and is expected to fall to 1% by spring next year and negative territory in the summer, according to analysts.
On top of all this the starting annuity income for retirees who want to inflation-proof their pension is around 40% lower than if they did not.
It has been said that insurance companies such as Axa, Liverpool Victoria, Reliance Mutual and Partnership will cut income on RPI-linked annuities in the event of deflation. Others, L&G, MGM and Norwich Union, will not, but will then not increase the annuity income until inflation has returned to its previous level. With Prudential and Standard Life, two large pension and annuity providers, it depends on your contract.
An escalating annuity whereby payments rise at a fixed 3% is a far better and safer buy.
