What is an Escalating Annuity?

I’ve been looking into buying an annuity and an escalating annuity comes up time and time again. I was just wondering what an escalating annuity is and whether it’s the same as an index-linked annuity?

Question asked by Mr S Shah
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Answered by Michael Englefield

What is an Indexed Annuity?

You’re right in that an escalating annuity is the same as an indexed annuity or an index-linked annuity.

To go back to basics, an annuity is a regular income you receive after retirement. You buy this income by exchanging your defined contribution pension pot for an annuity when you decide to stop working.

What is an escalating annuity?

How much income you’ll get from an annuity is based on your annuity rate. This is determined by a number of different factors, including your age, location, smoker status and whether you have any medical conditions.

Something else that will have an impact on your annuity rate is whether or not you opt to index-link your annuity. When you choose an escalating annuity, you’re opting for your pension income to rise over time in line with inflation. This is to prevent a fixed retirement income being eroded over time as prices rise.

Consider that annuities are typically long-term financial products that you may be receiving income from for decades. Then consider how much a pint of milk cost 30 years ago compared with now – it’s increased from 23.9 pence in 1986 to 42.7 pence by 2016.

When you buy an indexed annuity you typically receive a lower initial income, but this is to compensate for the fact that your pension will increase in the future along with inflation.

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Indexed annuity
 
Escalating annuity
 
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This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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