Submitted by Anonymous on
What happens to annuities if inflation turns-out to be as high as many people expect?
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tom replied on Permalink
Annuities and Inflation
It depends on the type of annuity.
Inflation is good for the person who is paying a fixed amount. This is why inflation is good for the debtor (think mortgage owner or the government)--it reduces the real value of their debt burden. In other words, you pay back your debt in future dollars that are worth less than today.
Inflation is terrible for the receiver of a fixed payment because inflation erodes the real value of their future receipts.
As a result, a fixed annuity without inflation protection could be a real problem in a highly inflationary envronment:
http://www.annuitydigest.com/blog/tom/fixed-annuity-sales-continue-soar-...
Variable annuities may provide some relief if the subaccounts are better able to keep pace with inflation, but there are no guarantees there.
One needs to consider inflation risk in light of any living benefits purchase:
http://www.annuitydigest.com/forum/cons-guaranteed-lifetime-withdrawal-b...
Overall, inflation risk is a critical consideration with any annuity purchase--particularly as it pertains to any fixed payments that are not inflation-protected.