Prices have risen by 42 per cent since the start of the decade, significantly eroding the spending power of retirees, according to Standard Life, which said inflation-linked annuities can help protect retirement income against rising living costs.

The provider's analysis found that a 65-year-old who bought a £100,000 inflation-linked annuity in January 2020 would have seen annual income rise from £2,900 to £4,050 by March 2026, generating more than £21,000 in total.

A level annuity would have paid more than £31,000 over the same period, but inflation-linked products are expected to overtake level annuities after between nine and 29 years, depending on future inflation.

Standard Life's research also found that 94 per cent of over-50s consider inflation an important factor in retirement planning, yet 48 per cent were unaware that annuities can include inflation protection.

The recent spike follows more moderate cumulative rises of 20 per cent between 2010–2014 and 15 per cent between 2015–2019.

Standard Life head of annuities, Pete Cowell, said: "After many years of relatively modest price rises, inflationary pressures have been a defining feature of the 2020s. We've seen a significant cost of living shock since 2020, with prices rising sharply over the past six years. For those in or approaching retirement, rising prices are a key concern, and factoring in some inflation protection is an important part of planning."

Despite the benefits of inflation protection, level annuities remain the most popular option, accounting for around 80 per cent of annuity sales in 2024/25, as they provide a higher guaranteed starting income.

According to Standard Life, the right choice depends on individual retirement needs and spending priorities.

Cowell added: “For some, inflation-linked annuities won’t be the right choice, and level annuities remain a vital option, particularly for those with higher spending early in retirement or who prioritise immediate income.

"However, for others, inflation protection can provide valuable long-term resilience, helping to maintain spending power as prices rise."

This article originally appeared in our sister publication MoneyAge.

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