“There is also an element of ‘timing the market’ here – does one lock in at annuity rates now or wait for a further improvement, at the risk of rates falling back? We don’t know,” he says.
“However there is a point here about raising the option of securing some of a client's income now.
"If the rates are the thing that promote proactive discussions and options for clients then it’s a good conversation, and yes some protection from inflation in terms of escalation is always an important consideration.”
While the income from an annuity would have kept up with the high rates of inflation in 2022 and 2023, Craig Muir, senior intermediary development manager at Royal London, says there are other considerations, so it is worth looking at the impact of inflation on any income that does not have any form of escalation built in, as the income will be reducing in real terms each year.
Muir adds: "Escalating or index-linked annuities increase by a set amount each year. Both options might be suitable for someone who is generally risk averse and would like peace of mind that their income will not run out.
"When this type of annuity is purchased, you can’t change your mind later and depending on how long you live, you might get back less than you paid."
Muir adds: “On the surface it looks like adding escalation to an annuity is imperative. However, there is a financial cost to that and the initial annuity is greatly reduced compared to a standard level annuity. It’s worth working out how long it will take to catch up with the standard level annuity.
“Then there’s the missed income as the individual would’ve been receiving a reduced annuity payment each year until they catch up to the standard level annuity amount.
"Figures calculated in February 2023 showed that a 65-year-old purchasing a standard level annuity, according to Hargreaves Lansdown best buy rates, would receive £6,637 per year.
"However, building in 3 per cent escalation and a five-year guarantee would reduce the income to £4,715. Therefore, an annuity escalating at 3 per cent per year will take 13 years for income to be greater than a level income and 23 years to surpass total income.”
Despite the cost of such a product, the benefits would seem to outweigh that, according to retirement planning experts.
Ormston says: “For me, there will always be a demand or want for guaranteed products in retirement. People like certainty and when going through periods of uncertainty or volatility some people will look for security.”
