Inflation-proofing retirement income: are clients overlooking a valuable annuity opportunity?

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We’ve seen a significant cost of living shock since 2020, with prices rising sharply over the past six years. While there were hopes inflation was easing, geopolitical uncertainty earlier this year has already had knock-on effects, with energy bills rising again this month. After many years of relatively modest price rises, inflationary pressures have been a defining feature of this decade. Prices have risen by 42%¹ since 2020, once the cumulative impact of inflation has been considered, according to our recent analysis of RPI data.

How inflation-linked and level annuities have performed since 2020

Our research² reveals 94% of over-50s say inflation is a key consideration when thinking about their pension, yet almost half (48%) are unaware that annuities can provide inflation protection. As a result, many retirees may be overlooking an option specifically designed to help maintain spending power throughout retirement. The inflation shock of recent years provides a useful illustration of how inflation protection can work in practice.

A 65-year-old who purchased an inflation linked annuity with a £100,000 pension in January 2020 would have seen their guaranteed income rise from around £2,900 a year to £4,050 a year by March 2026, reflecting the inflation experienced over the period.³

While a level annuity would have delivered a higher total income over this period, its purchasing power would have been steadily eroded by inflation.

For retirees, the key consideration is not simply how much income is received, but the spending power that income provides. A fixed income may go further initially, but prolonged periods of inflation can reduce its spending power significantly over time.

Inflation-linked annuities are designed to provide protection against one of the biggest risks facing retirees: rising living costs. By increasing income over time, they can help preserve spending power throughout retirement, although this comes at the expense of a lower starting income.

Across different potential inflation scenarios, the point at which an inflation linked annuity’s income exceeds that of a level annuity can vary significantly, ranging from around 9 to 29 years after purchase.³

Inflation assumption	Years before inflation-linked income overtakes level income
High inflation (8%)	9 years
Average inflation (6.4%)	12 years
Low inflation (2%)	29 years

_{Figures are illustrative and based on an inflation linked annuity purchased in 2020 with a starting rate of 2.9% and a £100,000 pension pot. Average inflation estimate is average inflation from 2020 – 2024 and projected forward. Actual inflation and annuity rates may differ.³}

The point at which income overtakes will vary depending on future inflation, but the objective remains the same – helping income keep pace with rising prices throughout retirement. It’s important to remember that even once the breakeven point has been reached, an inflation linked annuity will continue to increase each year to retain its real value. However, the spending power of a level annuity will continue to reduce as prices rise.

Inflation between 2020 and 2024 came as a shock to many, following more moderate cumulative rises of 20% between 2010–2014 and 15% between 2015–2019. The recent surge was driven by steep increases between 2021 and 2023, including the 11.6% RPI peak in 2022, before easing more recently.¹

One way to manage this is to ensure fixed costs are covered, so increases have less impact on discretionary spending. Inflation-linked annuities can help provide that protection, while another option is buying annuities in stages to benefit from higher rates as you get older.

Level annuities remain a strong and popular option

Level annuities remain the most common choice for retirees, offering a higher guaranteed starting income and simplicity. FCA data shows they accounted for around 80% of annuity sales in 2024/25.⁴

Today, a healthy 65-year-old with a pension pot of £100,000 might expect a rate of 7.5% from a level annuity, compared with around 5.0% for an inflation-linked annuity.³ While this means a lower starting income, the inflation-linked option offers the reassurance that income can increase over time, helping to protect spending power if living costs continue to rise. 

There’s no one-size-fits-all solution

The inflation shock of recent years has highlighted the challenge retirees face when living on a fixed income. For retirees who expect a long retirement or are particularly concerned about the impact of future inflation, inflation-linked annuities can provide valuable peace of mind and help preserve their standard of living over the long term. While they involve a lower starting income, they offer the reassurance that guaranteed income can rise alongside living costs, making them an important consideration as part of a broader retirement income strategy.

To find out how Standard Life can support your clients’ retirement income needs, visit our hub: Retirement income options.

Sources:

¹Inflation figures available: RPI All Items Index: Jan 1987=100 - Office for National Statistics

²Research conducted by Opinium with a nationally representative sample of 2,000 UK adults aged 50 and over between 27 August and 1 September 2025. Participants were asked a series of true/false statements in relation to annuities.

³Standard Life - Projected annuity Income and break even analysis: level vs. RPI linked options.

⁴FCA Retirement income market figures – 2024/25