Inflation-linked annuities rarely useful, advisers say

Advisers have warned that inflation-linked annuities are not suitable for most clients due to the long length of time taken for income to catch up.

Joss Harwood, chartered and certified financial planner at Eldon Financial, said timescales and a low starting income puts most clients off an inflation-linked annuity.

“For most people, the long timescale to the ‘break even’ point and low starting income is a negative for inflation-linked annuities, as most folk want to maximise income whilst ‘younger’ and more mobile,” she said.

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According to Steve Lewis, head of distribution of retirement products at LV=, more Bentleys were sold last year in the UK than RPI-linked annuities, highlighting the latter’s lack of popularity.

As at 29 November 2013, he said, a £100,000 pot with 25 per cent taken as a tax-free lump sum – leaving a £75,000 purchase value – would yield £2,861 in income for an RPI-linked annuity. For a level annuity, however, the sum would be £4,671.

Martin Bamford, managing director of Informed Choice advisers, echoed thoughts that the product is often not suitable.

“When we do the sums, few if any clients at the moment benefit from inflation-linked annuities,” he said. “It takes too long to reach the point where they have reached the same total income, even if we use the most optimistic life expectancy statistics.

“When having this discussion, some clients are comfortable with their state and any occupational pension income providing inflation-linking, with the maximum level income available from their private pensions.”