It's largely all about the increases they give you each year.
We’ve already discussed both types of annuities you can purchase at retirement. A living annuity or a guaranteed annuity. If you are thinking about a guaranteed annuity, it will be useful for you to also have a little insight into the different types of guaranteed annuities… because there are some differences.
Essentially, there are four types:
Fixed escalation annuities,
CPI or Inflation-linked annuities,
With-profit annuities, and
Level income annuities
The difference between them is largely all about the increases they give you each year. No matter which one you select, you are guaranteed an income for the rest of your life. But inflation will cause your expenses to increase each year. So, you need to ensure that your income increases in a way that can cover the increased cost of living.
There’s generally a trade-off with this. The higher your expected increases, the lower your starting income…
In the video that follows we discuss each of these four options in more detail. Watch and listen closely:
Ask for comparisons
If you decide that you’re wanting to go with a guaranteed annuity, ask for a comparison between a handful of guaranteed annuities. What are each of their starting incomes and what are their expected increases?
When comparing different product providers to one another, make sure you are presented with the same like-for-like option. That’s the only way you can really make a fair comparison.
I am passionate about helping people understand their behaviour with money and gently nudging them to spend less and save more. I have several academic journal publications on investor behaviour, financial literacy and personal finance, and perfectly understand the biases that influence how we manage our money. This blog is where I break down those ideas and share my thinking. I’ll try to cover relevant topics that my readers bring to my attention. Please read, share, and comment. That’s how we spread knowledge and help both ourselves and others to become in control of our financial situations.