You really need to think about pension annuity rates and an increasing pension annuity income as part of your annuity planning process. As an alternative to a pension annuity that pays a fixed income throughout your retirement, you can choose one that actually increases in payment each year, such as by 3%, 5%, or maybe in line with Retail Prices Index (RPI). Whilst this selection might help offset the effects of inflation, it does greatly reduce the initial income payable through the annuity.
Let’s take a close look at the different pension annuity rates that apply here. For example, if you opted for the 3% increase per annum the annuity rates you get, i.e. the starting income, would be around 25-30% lower than that payable by a level annuity, and, if you opted for the RPI increase per anum, your initial income would be around 35-40% lower than if you had selected a level income annuity. In both cases you would have a great deal of catching up to do to match the level income you would have received.
In figures, let’s assume a level income annuity quote of £300 per month. If you selected the 3% increasing option the initial income could go down to £225 per month. If, however, you selected the RPI increasing option the initial income could go down to £190 per month. Both figures represent significant initial shortfalls, which is fine if you can afford it, but study the annuity quotes carefully.
