Reports have show that those pensioners choosing an income that grows with inflation could actually end up with less money over the course of their retirement. These pensioners could actually end up short-changing themselves.
Linked to the Retail Prices Index, the cost of annuities has expanded to such an amount that the average pensioner has to live well beyond the expected average age before their total lifetime income is of a higher level.
Hymans Robertson are experts in pension consultancy and they have reported that under a ‘normal’ economic condition inflation linked annuities would be likely to end up unsuitable.
Experts have said that an index-linked annuity is a good option as it is guaranteed to rise in line with the inflation of the economy. On average the income can be 40% less than for a level annuity, but it will be expected to rise over time, as the economy improves.
However, it has been said that unless inflation improves rapidly then most pensioners who are saving will not live long enough for the income to surpass the total they would have been paid under a conventional annuity.
A male pensioner aged 65 years old would have to live to 98 years old to be better off if the annual annuity rate inflation averages at around 3%. Even if the annual annuity rate was to inflate at a great rate of 6%, the pensioner in question would have to live to the age of 80 years old to benefit. This is all well and goof but the average life expectancy for those born today is 87.8 years of age.
The annuity rates is a very confusing world at the moment and that is why it is really important to shop around and find an expert who can help you and advise as to which is the best option for you.