Annuity – to indexed link or not

As a financial advisor, I constantly tell my clients to be aware of inflation. It’s always there and will eat away at the real value of your money. So when it comes to annuities, why do I tell my clients not to protect their pension from inflation? Let’s look why.

Let’s take the following scenario:

  • 65 year old
  • single
  • pension pot of €500,000
  • Level pension of €23,925 per year
  • Indexed pension of €18,570 in year one increasing at 2% per annum

Annuity after 14 Years

It will take 14 years of payments before the annual amount paid under the indexed option is higher than the level annuity of €23,925. In that period, the person with the level annuity will have received an additional €38,314 in income.

Annuity after 26 years

It will take 26 years before the total amount paid out under the indexed option is more than under the level option. This client will be 90 years of age at that stage.

A 65 year old man has 15% chance of seeing his 90th birthday. A woman has a 28% chance of seeing the same birthday. They aren’t great odds.