Annuities confusing

OldMusicGuy

The Hargreaves Lansdown tool is pretty good, it lets you compare all options, see https://www.hl.co.uk/retirement/annuities/best-buy-rates

If you like what you see you can buy from them. But going with a good IFA is definitely worth considering.

ellajuk

Thank you to everyone above with all your input advices and feedback which I am taking pretty seriously.  I have also been comparing the differences between the various inflation linked annuities.  From what I gather the LPI option is capped to ie 2 or 3% and has a floor cap of 0%, my thoughts here is if the inflation went above 3% then the RPI option would surely be better, am I thinking this right? ie... a loaf of bread would not go up or down in value?

ellajuk

I am also thinking here if, for example, I take out a rpi linked annuity would I be pegged to that for life or would there be a clause that it would need to change to  CPIH in 2023?

ewaste

You'll get RPI as it's calculated now up until 2030 then what is currently called CPIH onward. It doesn't matter what the acronym is when it's the underlying methodology and "basket of goods" that is changing. 

Albermarle

my thoughts here is if the inflation went above 3% then the RPI option would surely be better, 

Of course, but RPI annuities are expensive ( a lot less income for the same lump sum input) as the provider has to cover themselves in case RPI shot up, like it has done recently.

OldMusicGuy

Albermarle said:

Of course, but RPI annuities are expensive ( a lot less income for the same lump sum input) as the provider has to cover themselves in case RPI shot up, like it has done recently.

When I bought an annuity earlier this year, 5% annuities were more expensive than RPI linked ones. 3% were cheaper but I wanted the protection against spikes in inflation like we have seen recently.

ellajuk

Thank you all for your further assistance. I have done two quotes on money helper one with rpi and one with 3%+ and the rpi one gives an annual income of 10% less than the 3% one.  This leaves me with a question.  There must be some model that they base these on, as after all their assessments must be critical especially when a lot of industries rely on this. I am thinking either there are different risks for different industries or it all pans out the same in the end, after all banks dont want to be out of pocket either.  

ellajuk

... otherwords... are they expecting the rpi to escalate further?

zagfles

ellajuk said:

Thank you all for your further assistance. I have done two quotes on money helper one with rpi and one with 3%+ and the rpi one gives an annual income of 10% less than the 3% one.  This leaves me with a question.  There must be some model that they base these on, as after all their assessments must be critical especially when a lot of industries rely on this. I am thinking either there are different risks for different industries or it all pans out the same in the end, after all banks dont want to be out of pocket either.  

The only real risk they take is life expectancy. They'll use normal gilts for level or fixed rate escalating annuities, and index linked gilts for RPI annuities. Anyone could construct a gilts ladder to guarantee payments till a certain date, whether fixed, flat rate escalation, or RPI, what you can't do as an individual is guarantee payments till you die. Unless you know the date!

zagfles

Albermarle said:

my thoughts here is if the inflation went above 3% then the RPI option would surely be better, 

Of course, but RPI annuities are expensive ( a lot less income for the same lump sum input) as the provider has to cover themselves in case RPI shot up, like it has done recently.

No they don't. They use index linked gilts. The govt covers them, and the market sets the cost relative to flat gilts.