Should I choose a level or an escalating annuity?

Full answer

When you buy an annuity with your pension pot, you choose how the income behaves over time. A level (flat) annuity pays the same amount every year for the rest of your life. Because the insurer is not committing to increases, the starting income is the highest available. The drawback is that inflation erodes its real value -- after 20 years, even modest inflation can roughly halve what that income buys. An escalating annuity starts at a noticeably lower income but increases each year, either by a fixed percentage (commonly 3%) or in line with an inflation index such as RPI or CPI. This protects purchasing power but you accept much less income in the early, often most active, retirement years. Who it affects: anyone using pension savings to buy a guaranteed lifetime income rather than staying in drawdown. The decision is irreversible once the annuity is set up. The key concept is the crossover point. Because the level annuity starts higher, it pays more in total for the first several years; the escalating version only overtakes it on cumulative income after, very roughly, 10 to 15 years, depending on the escalation rate and the gap between the two starting incomes. If you expect a long retirement or are very concerned about inflation, escalation can win; if life expectancy is shorter or you value income now, level often wins. 2026/27 note: annuity rates move with gilt yields and your personal and health factors, so the actual incomes quoted are specific to you -- always shop the open market. Both options can also add a spouse's pension and a guarantee period, which reduce the starting income. Model your own numbers and crossover point with a pension calculator before committing, and consider regulated advice.

Try the calculator