A level annuity (on a single life – see below) is the cheapest annuity you can buy. This guarantees a fixed level of income for the rest of your life, with no changes, and therefore pays out the highest amount on day one compared with other options. 

​However, the average retirement can now last more than 20 years. Inflation will therefore start to eat into the buying power of that fixed income unless some provision is made to increase it.

An escalating annuity can help. They pay out less on day one but the escalation rate you choose – which can be 1% pa, 3% pa, in line with inflation or even higher – helps to secure some or all of the buying power of that income over the longer term.