The take-up of annuities with index-linked/increasing annuity payments has been very low over the past six years, according to data from the Financial Conduct Authority.
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?
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.
This is because while annuities might look more attractive in nominal terms, since 2015 IFAs have advised many customers based on flexibility and the non-linear journey of income in retirement.
