Money Advice Service

If you’re buying a basic lifetime annuity to provide you with a retirement income, one of the key choices you must make is whether to opt for one that provides a fixed retirement income or one that increases each year. (This choice doesn’t apply to investment-linked annuities.)

Fixed income

You’ll initially get more with a fixed retirement income than with an increasing one, but its buying power will go down over time.

A fixed retirement income (sometimes called a level annuity) means you’ll get the same pension payments year after year for the rest of your life.

This means that over time you’ll be able to buy less with your income as prices of things like food and energy go up.

However, a fixed retirement income generally starts off higher than an increasing retirement income bought with a pension pot of the same size.

Increasing income

To help protect your income from rising prices, you can choose an increasing retirement income.

This is sometimes called an escalating annuity.

With increasing income you have two choices:

  • An income that goes up each year at a set rate - usually 3% or 5%
  • An income that’s adjusted each year in line with inflation – index linked

With index linked, if prices fall, then your retirement income would also fall, but, broadly speaking, whether your income goes up or down, its buying power will stay the same.

However, some providers will only allow your income to go up by a certain amount even if inflation is higher.

Which is worth more to you?

Here are a few pointers:

  • With an increasing retirement income, if you choose a high annual rate of increase your starting income will be a lot lower than you would get from a fixed retirement income
  • While a fixed income might seem tempting because it pays out more to start with, most people live on their retirement income for at least 20 years and in the last 10 years inflation has caused prices to rise by an average of 3-4% a year.

Deciding which option might be best for you will depend on a number of things, including whether you have other sources of income, and how long you expect to live.

You can use our annuity comparison tables to input your pension pot amount and compare the effect of the different choices side by side.

Other annuity options to decide on

As well as choosing between a fixed or increasing income annuity, you’ll need to decide whether you want it to provide an income for you only or also for someone else after you die (single or joint-life annuity).

You can also opt for extra features that will guarantee payments for a set period if you die sooner than expected or guarantee that you’ll get back at least what you put in.

See our guides below to find out more.

If you have a medical condition or a poor lifestyle you might qualify for a higher income, called an enhanced annuity.

If you think this might apply to you see our guide Higher retirement income for people with poor health.

Compare lifetime annuity rates

To compare how much retirement income you might get from a fixed or increasing annuity use our comparison tables below.

They also explain the other choices you need to make about annuity income and how to decide which might be suitable for you.

Get advice before taking out an annuity

Once you take out an annuity you can’t change your mind – and it’s just one of several options you have for taking your pension.

So it’s important to be sure it’s the right choice for you.

For an overview of all of your options and to find out where to get help and advice, including free government-backed guidance from Pension Wise, see our guides below.

This article is provided by the Money Advice Service.