Should You Choose a Level or Increasing Annuity?Written on July 24, 2025 by Kirk Rice LLP
When you approach retirement and look at annuity quotes, you’ll often see options for both level annuities (which pay the same income each year) and increasing annuities (which rise over time). It’s important to weigh the pros and cons carefully, as your choice affects your income throughout retirement.
This overview explains the key points you need to consider. Always get professional advice before making your final decision.
How an Increasing Annuity Works
An increasing annuity starts with a lower income but grows each year, often by a fixed percentage such as 3%. Over time, this helps protect your purchasing power against inflation.
If you choose an annuity increasing at 3% per year, it could take around 14 years for the annual income to match what you would have received from a level annuity. Until then, your income is lower.
In terms of total accumulated income, it often takes about 26 years for an increasing annuity to catch up with the total payments made by a level annuity. For example, if you retire at 60, you may need to live to around 86 before the increasing annuity has paid out more overall.
Points to Consider
- The early years of retirement are typically when you spend more, as you’re likely to be more active.
- A level annuity pays higher income from the start, which may better suit these early needs.
- With longer life expectancies, an increasing annuity could still be valuable over time.
- Inflation will reduce the buying power of a fixed income if you live many years in retirement.
- It’s impossible to predict when inflation will run very high for several years, but it could lead to hardship.
- In later years you are more likely to need to pay others to help you around your home and may incur care costs. A rising income will provide more towards this.
Book a free discovery call
Book a free initial call with one of our team to discuss your requirements.
Shop Around Before You Buy
You don’t have to accept an annuity quote from your current pension provider. Shopping around is very likely to increase your retirement income.
Speaking to an independent financial adviser will help you:
- Choose the most suitable annuity options from:
- Guarantees; Overlap or not; Value protection; in advance or arrears; with or without proportion; joint or single
- Consider the impact of health; lifestyle and postcode
- Compare all annuity providers
- Understand the impact of inflation and longevity on your retirement income
Next Steps
Choosing an annuity is a significant decision. Consider your spending plans, health, life expectancy, and appetite for risk. If you’d like help reviewing your options, please get in touch to arrange an appointment. Contact us via info@kirkrice.co.uk
Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of relief from taxation are subject to change. The Financial Conduct Authority does not regulate tax planning.
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