RPI Escallation and 3% Escalation Question

choi

How does RPI Escallation increase an annuity

If starting annuity is £7000.00 and RPI is 3.2% Year 1

What is annuity sum paid in Year 2 if RPI is 3.5%

Ditto

What is annuity sum paid in Year 3 if RPI is 4%

If RPI remains same each year does the annuity stay same or does it increase by the static RPI % each year

3% Escallation

I can see that initial annuity increases by 3% at year 2

Ditto

Year 2 annuity sum increases by 3% at year 3

Malthusian

choi wrote: »

How does RPI Escallation increase an annuity

If starting annuity is £7000.00 and RPI is 3.2% Year 1

What is annuity sum paid in Year 2 if RPI is 3.5%

Ditto

What is annuity sum paid in Year 3 if RPI is 4%

In real terms, i.e. what the money will actually feel like, £7,000, £7,000, and £7,000.

Is your calculator on strike?

If RPI remains same each year does the annuity stay same or does it increase by the static RPI % each year

If the Retail Price Index is the same each year then inflation is nil and an RPI-linked annuity will stay the same.

If the RPI % rate of increase is the same each year (aka "RPI inflation") then an RPI-linked annuity will increase by the same rate.

DT2001

A £7k annuity pays £7k in year one. If at the specified date RPI was 3.2% then in year 2 it would pay £7224 (£7,000 * 1.032). In year 3 it would be £7476 (£7224 * 1.035) if RPI were 3.5%.
You need to see if each annuity provider uses the same criteria for date of RPI. I have a DB pension and the RPI is taken on the same day each year but a few months before it is implemented to allow time for the figures to be advised etc.
As long as the RPI represents a reasonably close comparison to your increase in expenditure it does not matter as you will, in theory, always have £7k’s worth of buying power.

If the RPI stays the same each year it will not increase as inflation will be 0% but if you meant the rate of inflation remained the same in the example above £7224 becomes £7455 in year 3 (£7224 x 1.032).

3% escalation is as you say. £7k becomes £7210 in year 2 and £7426 in year 3.

MK62

The RPI inflation figure isn't a "spot" figure.......it relates to the previous 12 months, so the May RPI of 3%, represents the increase in inflation (as measured by the RPI method) over the previous 12 months.


The annuity provider should tell you which month's RPI will apply......for instance they may say that for annuities taken out in April, the Feb RPI figure (covering Mar-Feb) will be applied each subsequent April (but it could be the Jan RPI etc)

choi

I understand how 3% escalation works

Could you provide some information on RPI Escalation

Say I start on £7000.00 pa with an RPI annuity
If inflation is 4% during that year would my payment in Year 2 increase to
£7280.00 pa
If inflation was 4% in second year would my payment in Year 3 increase to
£7571.20

I just want to make sure I fully understand how RPI escalation works and whether it is the right option

cobson

choi wrote: »

Say I start on £6000.00 pa with an RPI annuity
If inflation is 4% during that year would my payment in Year 2 increase to
£7280.00 pa
If inflation was 4% in second year would my payment in Year 3 increase to
£7571.20

If you meant to say £7000 rather than £6000, then yes.

choi

cobson wrote: »

If you meant to say £7000 rather than £6000, then yes.

My error
I meant £7000

choi

What would happen in Year 4 if inflation fell to 2%

Is it as below

I start on £7000.00 pa with an RPI annuity
If inflation is 4% during that year my payment in Year 2 increase to
£7280.00 pa
If inflation was 4% in second year my payment in Year 3 increase to
£7571.20
If inflation was 2% in third year would my payment in year 4 increase to £7722.62
IE £7571.20 plus 2% of £7571.20
Just wasn't to make sure I get this right

MK62

choi wrote: »

What would happen in Year 4 if inflation fell to 2%

Is it as below

I start on £7000.00 pa with an RPI annuity
If inflation is 4% during that year my payment in Year 2 increase to
£7280.00 pa
If inflation was 4% in second year my payment in Year 3 increase to
£7571.20
If inflation was 2% in third year would my payment in year 4 increase to £7722.62
IE £7571.20 plus 20% of £7571.20
Just wasn't to make sure I get this right

If you mean 2% then yes that's right - I'm assuming the 20% is a typo and should be 2%, as the figure of £7722.62 is correct.

choi

MK62 wrote: »

If you mean 2% then yes that's right - I'm assuming the 20% is a typo and should be 2%, as the figure of £7722.62 is correct.

Yes meant 2%
Amended my post

jamesd

The big difference comes if we see a repeat of the 1970s when inflation was mostly above 10% and peaked over 20%.

You don't have to pick one type of annuity, you can buy some of each. About 90% of pensions bought have no annual increases.

If you're close to state pension age, deferring claiming your state pension is usually a better buy because it's increased by 5.8% of the amount you spend deferring and the extra increases with the CPI measure of inflation.

If you're willing to accept investment ups and downs you can use income drawdown to get about 3.2% of your pot as annual income increasing with inflation, assuming a 30 year plan and 1.5% costs. If you're willing to skip inflation increases or take cuts if you happen to live through bad times you could start at 5%. These options already have a 100% spousal pension included if they are around your age or older, if a lot younger it would be less than 100%. The spouse simply inherits the remaining money to use as they wish, continuing the plan or not.

You can mix in some amount of any of these things.