Level or Indexed Annuity?
Level or indexed annuity?
It is possible to choose either a level or indexed annuity.
At first glance, an indexed annuity would appear to be the obvious choice.
However, the starting income from an indexed annuity would be less, possibly substantially less, than the starting income from a level annuity and it may be a long time before the indexed annuity would have provided you with more money overall.
On the other hand, inflation would, over time, erode the 'real value' of a level income, so if you were to live for a long time, you may be better off with an indexed annuity.
To help you decide which is right for you, please use our level or indexed annuity calculator
Level annuity
A level annuity will 'do as it says on the tin' and will remain level for the rest of your life.
It will provide you with a higher initial income than an indexed annuity, but inflation would reduce its' purchasing power over time.
Indexed annuity
An indexed annuity will increase at a set rate, which would be chosen by you at outset.
You could choose indexation to be in line with the retail prices index, or at a set figure, for example 3% compound, or 5% compound.
The higher the level of indexation you choose, the lower would be the starting annuity income.
It should not be an automatic choice to take an indexed annuity, as it can be many years before the indexed income catches up with the amount that a level income would have paid from day one.
However, as inflation would eventually erode the 'real value' of a level income, if you were to live for a long time, you could well be better off with an indexed annuity.
