I’ve protected my pension towards inflation for all times, says retirement skilled STEPHANIE HAWTHORNE

I used to worry when inflation surged – as it did last week to an unexpectedly high 3 per cent. After all, at 68 I have savings built up over my career that I will rely on should I ever decide to retire (not any time soon, I hope). Inflation perniciously erodes away the value of nest eggs.

But my worries abated last week – because I spent £189,000 of my life savings on an annuity – a financial product that guarantees me an income with inflation protection for life. I’ll get £12,434.88 in the first year – pretty good, I think. But the beauty of it is, every year the annual amount I get will increase by 3 per cent.

That means if inflation shuffles back down to the Bank of England’s target of 2 per cent, I’ll have a little pay rise every year. And at times like this when inflation is above that, I should still be relatively well protected.

It looks like I’m not the only one plumping for an annuity at the moment. They fell out of favour for years after former Chancellor George Osborne made them optional when he announced pension freedoms in 2015. Retirees instead opted to keep their pension funds invested and take an income from them as and when they needed to.

But the income that you can get from an annuity is generous – they hit levels last month not seen since 2008. That is because rates are determined by gilt yields, which were soaring. I’m not surprised that annuity sales last year were at a ten-year high.

I decided that the time had come to lock into a deal. That way, my annuity and state pension will pay out an inflation-protected income, forming a reassuring bedrock to my income.

However, choosing was easier said than done. It was one of the hardest decisions of my life, because it is irrevocable. Even when buying a house you know that you can always resell it if you make the wrong call. But you can’t resell an annuity once you’ve bought it. And there are so many options to choose from, it can feel quite overwhelming.

First, I had to decide whether to get one with inflation protection. The benefits are obvious, but if I’d opted for one without, I would have got a far higher starting income – it just would never have increased in pounds and pence terms.

I was quoted £14,221 for this type – including a guarantee that the annuity would continue to pay out to my loved ones for five years even if I passed away within that time.

Next, I had to decide if I wanted a single annuity – that ends when I die – or a joint one that would continue to pay out to my spouse should I die first. I am single, so the answer seems obvious. But what if I marry – would I deny a future spouse some valuable income on my death?

The next decision was easy – I opted for an enhanced annuity, rather than a regular one. An enhanced version gives you a higher annual income if you declare certain health conditions.

Like most 68-year-olds, I have several that make me eligible. I checked my records on the NHS app and put them on my annuity application form. Thank goodness I did. As many as 84 per cent of retired annuity holders who would likely qualify for an enhanced version do not have one, according to Legal & General. 

After that, I had to decide which provider to go with. Many people fall into the trap of going with the same company their pension is with. But these are rarely the best deal and could give you thousands of pounds less over the years. 

A 70-year-old buying an annuity with £50,000 would end up with £7,400 more in income every decade if they opted for the best deal over the worst, a study by provider Just Retirement found. My pension was with Standard Life, but when I shopped around, I found I could get a better deal elsewhere.

To pick one, you can go to a broker, get independent financial advice if you prefer, or you can get a free appointment with the government-backed service Money Wise to guide you through the basics. You can get an hour’s appointment once you reach the age of 50 – or you can get a self-guided service online. Go to moneyhelper.org.uk.

The biggest decision was whether to buy an annuity at all. After all, I could have just left the money to continue to grow in my pension. If I died after just a few years, the annuity would die with me, whereas if I still had money left in my pension it could be inherited by my family.

Edward Fowle, financial planner at Mercer And Hole, sums up the decision: ‘Essentially the whole thing is a roulette wheel spin on how long you will live and the house normally wins – how many insurance companies normally go out of business?’

It doesn’t have to be an either-or decision. One option is to get an annuity that covers your day-to-day living costs with an annuity and state pension and then you can have more flexibility with anything left over. If you are turning a defined contribution pension into an annuity, you can usually take up to 25 per cent of it up-front as a tax-free lump sum as well.

But there is more to it than just money. Too often, conversations around the value of an annuity are limited to rates. But Lorna Shah, general retail retirement director at Legal & General, points to a clear ‘happiness advantage’.

‘The stability of a guaranteed income gives retirees peace of mind that their money won’t run out, even if they live past 100,’ she says. ‘It takes the guesswork out of budgeting and lets people focus on enjoying retirement, rather than spending time worrying about their finances.’

So that’s my decision. I’ve taken the plunge, there’s no going back – and now I can relax a little even if prices are still rising faster than we’d like.

• Stephanie Hawthorne is an award-winning journalist and editor of Pensions World from 1989 to 2017.

Would you buy an annuity? Email: money@mailonsunday.co.uk.