Is it worth buying an index-linked annuity?

On average, less than 15 per cent of all annuities purchased have included this option. 

However, in the past 18 months, inflation has been on the rise and has been at the forefront of people's minds. 

Highlighting data compiled in-house, Mark Ormston, director of propositions and corporate partnerships at Retirement Line, says it is showing a big increase in people selecting this option, something he hopes will be replicated across the industry and reflected later this year when the FCA publishes the latest edition of their retirement income market data. 

So, is it worth buying an index-linked annuity as part of one’s retirement portfolio?

There will always be a demand or want for guaranteed products in retirement.Mark Ormston, Retirement Line

Ormston says: "When people are looking at an annuity, they are often having to weigh up immediate income needs while also having to think about the long term.

"Having higher annuity rates supports people in selecting some of the longer-term annuity options because the reduction in immediate income is more manageable.   

"The longer the annuity is likely to pay out for, the more likely inflation will impact it. With this in mind, if an annuity is being purchased in the earlier stages of the pension income journey, many people may benefit by considering an escalating annuity to help against the impacts of inflation."

Claire Trott, divisional director for retirement and holistic planning at St James’s Place, says choosing the right shape of annuity will always be a very difficult decision.

“The overall cost of index linking can be very high, reducing your starting income to a much lower level,” Trott adds. "This level may not be sufficient to provide the income needed at the outset, so it will be a case of reviewing alternative options, index linking part of the annuity, or accepting the risk of inflation to ensure you have what you need.

"It is also worth noting that it isn’t generally necessary to commit all the funds to a single annuity purchase at the outset.”

So a thorough review of the client’s circumstances, their needs with regards to income and their plans for retirement are imperative when looking at an indexed income versus level income.

Meanwhile, Tim Grey, managing director of Sandringham Financial Partners, argues that there is a healthy negative correlation between what is in fashion and what makes good financial planning advice. 

The figures on the page might tell us one thing is better, but the client’s reaction to that solution might tell quite a different story.Tim Grey, Sandringham Financial Partners