In the world of pension annuities; what is an inflation proof annuity? As you might gather, they are designed to protect against the possible ravages of ongoing inflation. Whilst you can build in annual increases under a standard or conventional annuity, these will probably not match the level of inflation. An inflation-proof annuity will keep its real value throughout the life of the annuity as it is linked to annual changes in the Retail Prices Index (RPI). Therefore, any annual rises in inflation will be matched by a rise in your annual annuity income.
The main advantages of inflation proof pension annuities are that they will provide an income for the rest of your life whilst protecting your buying power. They will help protect against high inflation and price rises. There are some disadvantages; the initial annuity income will be lower when compared to a level conventional annuity; the annuity rates you get will be based on a forecast of future inflation, and, unless you take out a guarantee against zero inflation, if the inflation rate were to hit 0% or go below then your income would go down. In addition, it’s probably fair to say that the RPI is not always the best barometer of pensioner income or spending levels.