Conventional annuities pay a higher starting income than inflation-linked annuities but over time inflation can erode 50% of your purchasing power.
MGM Advantage analysed various retirement income options to see which could potentially offer the best way to counter the effects of inflation eroding your retirement income.
By modelling four options: conventional annuity, inflation-linked annuity, an annuity increasing at 3% a year and an investment-linked annuity, the company has worked out the total income from each over a typical 22-year retirement.
Inflation-linked or escalation options, although protecting your purchasing power from the ravages of inflation, offer a much lower starting income than conventional annuities. The total income over time is also less than conventional annuities, typically between 5% and 24%.
Investment-linked annuities by contrast can potentially offer the best of both worlds, with a flexible income which can initially match or exceed a conventional annuity, and the ability to help protect your income from inflation through the returns from equities.
"Inflation remains a key issue for people considering retiring, who find themselves caught between a rock and a hard place with low annuity rates and inflation running above target. Nothing disintegrates under the glare of inflation like a fixed income,” said Andrew Tully, pensions technical director at MGM Advantage.
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