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Having a reliable income in retirement is a priority for most of us, so it’s hardly surprising that annuity sales reached a massive £7 billion last year, a 34% increase compared to 2023.
However, choosing whether to go for a level (fixed) annuity or an inflation-linked annuity, which provides an income that increases in line with living costs, can be challenging, especially as the initial income offered by each of these can vary dramatically.
This article explores how annuities work, the differences between these two types of annuities, their pros and cons, and some of the factors you’ll need to consider to help you decide which might be right for you.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
How do annuities work?
You can buy an annuity with some or all of your pension pot, and having one can provide valuable peace of mind that you’ll know exactly what you’ll have coming in each month when you retire.
The amount of income you get from an annuity depends on how much money you use to buy it, along with factors such as your age, health, and lifestyle, and the type of annuity you choose. For example, if you’re in a couple, you might want to consider a joint life annuity which pays you an income until you pass away, at which point it transfers to your partner or spouse and pays them an income until they die. Alternatively, if you have a medical condition, you might be eligible for an impaired life annuity which will provide you with a higher rate of income because your life expectancy may be shorter.
Annuities are not without their drawbacks, however. David Hunter, wealth planner at Succession Wealth, said: “One of the main downsides of purchasing an annuity is its irreversibility. Once purchased, you typically cannot access the capital used to buy the annuity, meaning you lose control over your money.
“Annuities may offer lower returns compared to other investment options, especially in times of low-interest rates. Annuities are inflexible, and once the terms are set, they cannot be changed. This may not suit you if you prefer flexibility or anticipate that your financial needs may change.”
You can find out more about annuities in our guide Annuities explained and about your options more generally in our articles What are your pension options at retirement? and Annuity vs drawdown: which is right for you?
Inflation-linked and level annuities compared
When deciding what sort of income you want your annuity to provide you with, you can choose from an inflation or index-linked annuity that will provide an income that keeps pace with rising living costs, or a level annuity, which provides a fixed income for your lifetime.
If you opt for an inflation-linked annuity, initially your payments will typically be lower than the amount you’d get from a standard level annuity, but over time, and as living costs rise, the aim is that you should ultimately end up with a higher level of income. Find out more in our guide Are inflation-linked annuities good value?
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “It’s understandable why people might be tempted to go down the level route. The most recent data from our annuity search engine shows that a 65-year-old with a £100,000 pension can get up to £7,814 from a single life level annuity with a five-year guarantee. This compares to £5,724 per year from an annuity that increases by 3% per year.
“However, with retirement potentially lasting twenty years or more the issue of inflation does need to be taken into account. We don’t need to see the blockbusting levels of inflation of recent years for it to have an impact. Even relatively low inflation over time will nibble away at your purchasing power and could mean your budget gets increasingly stretched over time.
“This means that even though inflation-linked annuities offer a lower income at outset, the fact that incomes increase every year can offer valuable reassurance, alongside your State Pension, which also increases in line with the triple lock.”
How long does it take for the income from an inflation-linked annuity to reach that of a level annuity?
When deciding which kind of annuity to go for, the million-dollar question is, of course, at what point will you end up better off with an inflation-linked annuity compared to a level annuity?
This will very much depend on your individual circumstances, including the size of your pension pot and the age at which you purchased your annuity but, based on the example above, a 65-year-old would need to wait until they were 76 to get an income exceeding £7,814.
Ms Morrissey said: “They would then have to wait until they were 85 before the total income from the inflation-linked annuity outstripped that from the level one. So, there are a lot of factors to consider before making your choice.”
These factors include:
1. Life expectancy
Although no one can accurately predict exactly how long they’ll live for, if you expect a longer retirement, an inflation-linked annuity may help you maintain your purchasing power over time, whereas a level annuity won’t.
2. Inflation outlook
Consider current and projected inflation rates. Higher inflation erodes the value of fixed incomes, making inflation protection more valuable. Bear in mind, however, that inflation forecasts are just that, and there are no guarantees of what the inflation rate will be in the coming years.
3. Existing income sources
If you have other income sources that are inflation-protected, such as the State Pension, you might decide that a level annuity will suffice.
A final thought…
Whether you opt for a level or an inflation-linked annuity will depend on various factors, including your life expectancy, outlook on inflation, any other income sources you might have, and your personal preferences.
Bear in mind too that it doesn’t necessarily have to be a case of either one or the other. You might decide to opt for a combination of level and inflation-linked annuities so that you can balance your immediate income needs with longer-term protection against rising living costs.
Ms Morrissey said: “You may opt to go down the inflation-linked route as you feel confident that you will live a long and healthy retirement. You may also opt to combine annuities – whether level or inflation-linked – with income drawdown. This enables you to keep a portion of your pension invested where it has the opportunity to grow and gives your retirement planning a bit of extra flexibility.
“Annuities can play a really important part in your retirement planning but once bought they cannot be unwound. This is why it’s really important to do your research and weigh up the pros and cons before opting for your annuity.”
If you’re not sure which is the right option for you, you may want to seek help from a professional advisor, so that you can make an informed decision that aligns with your retirement goals.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
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