Choosing escalation option with pension: For or Against

[padraig mac]

I’m wondering whether choosing the escalation option with an annuity-based pension payout is good (or bad value).

For example in a given scenario, choosing a 3% escalation option with a €100,000 annuity would result in an annual pension which would be about €2,000 lower that if a 0% escalation were chosen.

It’s obvious from this that in the case of the pension with the escalation option it would take many years for the annual pension payout to reach the level of the initial payout of the pension with no escalation option.

It seems to be a very expensive way to provide some level of protection against inflation.

Any views would be welcome.

 

[South]

Hi Padraig

It would usually be costed so that the two overall gross payments under the two scenarios would be equal based ona typical life expectancy...with the escalating pension your payments are weighted more towards the future, so if you expect to live longer than the average male (about 88/89 if you are 65 now) then it would be worth going for the option with escalation as it puts more weight on the payments towards the future than the flat pension!

 

[padraig mac]

Many thanks South

 

[South]

Similar considerations for the spouse pension and guarantee period.

No problem Padraig - best of luck with it!