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Kirk Rice Blog

Increasing or Level Annuity – Whats Are the Pros and Cons?Written on September 19, 2023 by Kirk Rice LLP

Financial Services Questions

The Question:

I received a variety of annuity quotes from my Pension provider including one for an annuity that will increase each year by 3%pa and one for an annuity that will not increase. I like the increasing annuity but the initial income is a lot lower than the income from the annuity that will not increase and I am undecided as to which to choose.

Kirk Rice LLP answers:

Increasing annuity will initially pay a lower Income compared to a Level annuity. However, the income from the Increasing annuity will increase each year and eventually it will pay the same amount of income, and thereafter more, as the Level annuity.


If you selected an annuity that increased at 3%pa it would typically take about 14 years for the income to equal that of the Level annuity. This means you will have waited 14 years to get the same income from the Increasing annuity that you could have had from the Level annuity now. During the previous 14 years the Level annuity was also paying a higher income. Over time though, as the Increasing Annuity goes up the difference each year reduces.


To analyse both we need to work out how long it will take for the accumulated income from the Increasing annuity to equal the accumulated income from the Level. This will typically be about 26 years; if you retire at 60 the Increasing annuity will not represent better value until you are 86. In my experience the first 5 to 10 years of retirement are when retirees need the most income as they are now doing all the things they planned to do when they retired.


Given this and the figures above, the Level annuity may be the better option but you obviously need to consider your own personal situation. It is also a fact that life expectancy has increased and we can expect to live for longer. An alternative solution could be a With Profits annuity as the income from this type of annuity can increase depending on the performance of the underlying With Profit fund.


Equally though the income can decrease but there will be a minimum guaranteed income albeit lower than a traditional annuity. You do not have to buy your annuity from your existing pension provider; you can shop around which can be worthwhile as the difference could be an extra 20%. An Independent Financial Adviser will be able to review your options fully.

If you would like to discuss annuities or require any other financial planning assistance, please email info@kirkrice.co.uk to arrange a call with one of our Financial Planners. Kirk Rice offers a free no, obligation first meeting and fees and costs of work involved would be discussed. We do not carry out any work without your consent and agreement to fees.

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Please note: our articles are for general guidance on the date of publication only and, specific advice should be taken before acting on any of the suggestions made.