How to give yourself a pay rise in retirement

Buying the right type of annuity is one of the biggest decisions people have to face as they approach retirement. They have to decide if they should buy an annuity that provides a level income, rises in line with inflation, or offers the prospect of capital growth and an increasing income.

Kevin Pacey, head of Bank of Scotland Annuity Service, said: "Inflation is the enemy of retired people because it erodes the buying power of their pensions. Once you retire there are no more bonuses, no more overtime and no more promotions. People face a dilemma when it comes to buying an annuity: should you take a flat-rate annuity that pays a higher income initially but which is eroded by inflation, or buy an escalating annuity that pays a lower rate initially but rises each year?

"Inflation-linked annuities generally become better value the longer you live and the higher inflation is. At the age of 65, about 17% of men and a quarter of women can expect to live to 95; which gives inflation plenty of time to erode a pension income. However, there is no simple answer as to the best type of annuity; it depends on the customer's individual circumstances such as age, health and risk profile and that is why it so important to take advice to find the best annuity for your retirement."