Inflation Adjusted Annuity

By: EconomyWatch   Date: 14 October 2010

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Inflation adjusted annuity is becoming more and more popular among people as it protects investors from losing their purchasing power. Inflation adjusted annuity is more popular in the United Kingdom (as was the case in the year 2005). It has not gained popularity in the United States of America as yet.

An inflation adjusted annuity resembles an immediate annuity. The payments of inflation adjusted annuity are indexed as per inflation rate. Too many inflation adjusted annuity programs are not prevalent in USA. Vanguard Lifetime Income Program is an inflation adjusted annuity program, which is offered in America. However, the annuities have a cap. The payments associated with inflation adjusted annuity can rise to a maximum of 10 percent during inflation.

James and Vittas, two eminent economists say that, one has to pay a price for availing protection from inflation. This price differs from country to country and each country may have their own set of rules.

Inflation adjusted annuity for the retired individuals:

Inflation, most commonly affects the old retired individuals. It eats up majority of their savings.Majority of the retirees depend on inflation adjusted annuity for their livelihood. This is the state of affairs because social security is not enough to meet the retirement needs of a retiree. An inflation adjusted annuity can be of a duration, which cannot exceed 30 years. The same does not hold true for the annuities, which are not inflation adjusted. They can have a term up to 40 years to 50 years.

Inflation adjusted annuity requires one to pay less initially. Thereafter, due to inflation, the value is compounded and increases every year. Alternatively, some opt for annuities, whose payments increases gradually ranging between 1 percent to 5 percent.

The pricing of the inflation adjusted annuity is required to be competitive as compared to the regular annuities. However, the inflation adjusted annuity is capable of nullifying effects of inflation, which makes it more appealing to the common man.

 

In a nut shell, the advantage of investing in inflation adjusted annuity can be summarized as under:
  • It assures investors of a fixed return at regular intervals for a couple of years.
  • The investment is inflation adjusted so the value of money remains stable, if not less.
  • It provides financial assistance to the spouse.

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