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Are RPI annuities very expensive?

FIREDreamer
FIREDreamer Posts: 823 Forumite
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Age 60, joint life 50% spouse annuity rates per £100,000 purchase money are as follows:

Level: £6,200 per annum
RPI: £3,600 per annum

Assuming 3% inflation, over the government’s target of 2%, the RPI annuity doesn’t reach the same amount as the level annuity for 18 years (age 78) and presumably you never get back the lost income pre age 78 before you die.

At 5% inflation it doesn’t seem so bad (12 years to match level annuity amount).

Am I mad to be considering an RPI annuity?

Pros:
(1) I can safely retire stress free if I use 70% of my drawdown pot on such an RPI Annuity
(2j No sequence of return issues
(3) Enough money for legacy or discretionary / emergency spends in main home and S&S ISA
(4) The 3.6% RPI annuity rate isn’t miles below the theoretical SWR of the 4% “rule”
(5) The SWR for UK investors is probably nearer 3.6% if not less
(6) I can pay (80% grossed up to) 100% salary into SIPP if I carry on working to rebuild DC pot

Cons:
(1) Seems an expensive option for peace of mind
(2) The purchase money is no longer mine (guarantee period can alleviate this)
(3) Relying on a (not insignificant) volatile DC pot for retirement income won’t be stress free

Pros/Cons:
(1) The grass is always greener!

Quite ironic that most posts here are people with DB pensions wanting to transfer to DC whereas I seem to be of the opposite persuasion.

Not sure what I am asking here. Maybe I am just rambling to myself but does anyone have any comments as I don’t know whether to jump one way or not.
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Comments

  • billy2shots
    billy2shots Posts: 1,125 Forumite
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    DC only here when I retire (41) . Basing my swr on 3% plus inflation. 

    3.6 seems good to me for the peace of mind, especially in today's world where inflation may stay higher for longer. Those earlier years of a flat rate could be eaten into if 4% inflation happens for the next 4 years. 

    The deciding factor would be legacy. Do you want the chance to leave some of this pot to someone, have you got other money earmarked for inheritance or are you happy to not pass a legacy on?
  • Qyburn
    Qyburn Posts: 3,156 Forumite
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    It's going to be down to personal preference. For me the only reason to choose an annuity would be certainty, and without inflation linking you don't have that. So for us the only thing I'd even consider would RPI linked and 100% survivor benefit.
  • DC only here when I retire (41) . Basing my swr on 3% plus inflation. 

    3.6 seems good to me for the peace of mind, especially in today's world where inflation may stay higher for longer. Those earlier years of a flat rate could be eaten into if 4% inflation happens for the next 4 years. 

    The deciding factor would be legacy. Do you want the chance to leave some of this pot to someone, have you got other money earmarked for inheritance or are you happy to not pass a legacy on?
    I have an S&S ISA for any legacy plus whatever amount of the 30% DC pot that I don’t annuitise and don’t spend (probably most of the residual DC if the annuity is adequate - which it should be).

    I also have some DB already in payment from previous employments.
    Qyburn said:
    It's going to be down to personal preference. For me the only reason to choose an annuity would be certainty, and without inflation linking you don't have that. So for us the only thing I'd even consider would RPI linked and 100% survivor benefit.
    My fear is I can retire if I annuitise but with 100% DC apart from the small DB I will probably be stuck in one more year mode for longer than is really necessary.

    My wife wouldn’t have a clue with drawdown and investments so she would need an annuity or someone to manage the pot should I predecease her (which is statistically most likely).
  • QrizB
    QrizB Posts: 15,309 Forumite
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    edited 24 August 2023 am31 8:57AM
    I don't think your comparison is quite right. Reasons follow.
    2% is the CPI target. For at least the last decade, RPI has generally been 1-2% higher than CPI. Assuming a long-term RPI average of 3% might not be conservative.
    RPI has the potential to be significantly higher than 3%. What was it last year, over 12%? You are paying for the comfort of knowing you'll track it no matter how high it goes.
    Per HL's best buy table, if you're happy with 3% escalation your £100k will buy you almost £4200 on the terms you describe.
    N. Hampshire, he/him. Octopus Intelligent Go elec & Tracker gas / Shell (now TT) BB / Lebara mobi. Ripple Kirk Hill member.
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  • OldScientist
    OldScientist Posts: 738 Forumite
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    edited 24 August 2023 am31 9:06AM
    Whether an RPI annuity will have been a good purchase compared to a level one will only be known in retrospect.

    One thing to remember in these calculations is (as we now all know again) that inflation can be lumpy and consequently sequence of inflation is as important as sequence of returns is for portfolio withdrawals.

    For example, with 4 years of 10% inflation followed by 20 years of 2%, the income from RPI annuity exceeds that of the level one after 13 years, while for the case of 20 years of 2% inflation followed by 4 years of 10% inflation the income from the RPI annuity doesn't exceed that of the level one for 22 years.

    One further pro in favour of the RPI annuity is that if you consider an annuity as longevity insurance, then you don't want it to fail just when you need it (i.e., late in life).

    Just to muddy the waters, unless the set up fees make it not worthwhile, as a compromise you could allocate a portion of the 70% of your portfolio to an RPI annuity and a portion to a level annuity. This would have the benefit of giving an early boost to income (while you are healthy and pre-state pension) but at the expense of a lower guaranteed income later in life. For example, out of £100k, an allocation of £70k to RPI and £30k to level, you'd start with an income of £4.38k, but potentially only just over £2.52k in later life if inflation turns out to be high.



  • Albermarle
    Albermarle Posts: 25,990 Forumite
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    An RPI annuity is expensive as the provider has to calculate in the possibility of a sustained period of high inflation. I might be wrong here but I believe they are not that popular due to their high cost/reduced pension.
    If you throw in guarantees and 100% spouse pension on your death, then the pension just gets smaller and smaller. It is a kind of overinsurance.
    As @QrizB mentions, a compromise is a fixed 3% escalation, or similar.

    OP - Another compromise is to annuitize just a part of the pot and keep the rest invested. Maybe even reinvest the tax free cash.

  • westv
    westv Posts: 6,325 Forumite
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    I think pre 2015 the most popular annuity was level.
    Thank goodness pension freedoms came in though otherwise there would now be a whole raft of people moaning that they had to buy an annuity when rates were very low!
  • michaels
    michaels Posts: 28,791 Forumite
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    An RPI annuity is expensive as the provider has to calculate in the possibility of a sustained period of high inflation. I might be wrong here but I believe they are not that popular due to their high cost/reduced pension.
    If you throw in guarantees and 100% spouse pension on your death, then the pension just gets smaller and smaller. It is a kind of overinsurance.
    As @QrizB mentions, a compromise is a fixed 3% escalation, or similar.

    OP - Another compromise is to annuitize just a part of the pot and keep the rest invested. Maybe even reinvest the tax free cash.

    Why over insurance?  Unless you decide you are happy for your pension to decline by a random and potentially non-trivial amount every year then you need inflation protection.

    Spousal protection?  My plan is that the difference between single and dual provision will just be one state pension which is about 25% of our planned joint annual income in retirement.
    I think....
  • Marcon
    Marcon Posts: 12,984 Forumite
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    edited 24 August 2023 am31 10:02AM
    I think your thread title is asking the wrong question. Whether something is 'expensive' isn't quite your issue from what your post says; it seems to me you are trying to work out if the cost is worth it to you.

    Sometimes (re)reading your own post gives a clue to the answer, and from what you say, the answer is highly likely to be 'yes', especially given what you say about your wife and her lack of enthusiasm/experience in the field of investing.
    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
  • LHW99
    LHW99 Posts: 4,954 Forumite
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    Annuities also get better value the later you leave buying.
    When you get to the point of lost marbles (or even at the "can't be bovvered with the hassle of drawdown") an annuity could be a good option, even considering the potential loss of capital if you die shortly after any protection period.
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