RPI - linked annuity

TheGreenFrog

I am considering buying an RPI-linked annuity with part of my pension fund.  I am at early stage but wonder whether the RPI reference point is for the life of the annuity or, like linkers, will change to CPI in the future? I have also heard that the RPI increase may be subject to a cap.  Presumably this all depends on the exact wording of the annuity but does anyone have any recent experience of typical terms?

tacpot12

It's not unusual for an RPI or CPI linked annuity to have a cap on the inflation increases. The insurer can't afford an open-ended committment. If you have savings you are not using to buy the annuity with, these might help you if the rate of inflation goes above the cap. 

My expectation is that an RPI-linked annuity should remain linked to RPI unless that index is discontinued by the government. 

Sorry, I don't have any recent experience to offer. I hope you do get some information from someone who has bought an annuity recently. 

TheGreenFrog

tacpot12 said:

It's not unusual for an RPI or CPI linked annuity to have a cap on the inflation increases. The insurer can't afford an open-ended committment. If you have savings you are not using to buy the annuity with, these might help you if the rate of inflation goes above the cap. 

I would think that, in theory at least, the insurers can give an uncapped CPI commitment.  They can hedge by purchasing index-linked gilts.   Duration of the gilt hedge is a mortality risk. 

SnowMan

As I understand it RPI will continue after 2030 but it will then take on the CPIH methodology. Therefore there won't be an old calculation RPI calculation after 2030 for the insurer offering the index linked annuity to follow.

DullGreyGuy

TheGreenFrog said:

tacpot12 said:

It's not unusual for an RPI or CPI linked annuity to have a cap on the inflation increases. The insurer can't afford an open-ended committment. If you have savings you are not using to buy the annuity with, these might help you if the rate of inflation goes above the cap. 

I would think that, in theory at least, the insurers can give an uncapped CPI commitment.  They can hedge by purchasing index-linked gilts.   Duration of the gilt hedge is a mortality risk. 

There are certainly annuities out there which have neither caps and/or floors but much of my annuity work has come from the DB pension schemes rather than DC or personal plans and in that space the annuity has to mirror what the scheme offered. 

Indexed gilts are the obvious solution but there is high demand for them, the lack of salary indexed gilts is the thorn in the side of periodic payment orders and the inability for insurers to just buy an annuity to discharge their responsibility. 

dunstonh

I am considering buying an RPI-linked annuity with part of my pension fund.  I am at early stage but wonder whether the RPI reference point is for the life of the annuity or, like linkers, will change to CPI in the future?

An RPI annuity is bought on terms that assume RPI.  A CPI annuity is bought on terms that assume CPI.    You can also get versions that don't reduce in deflation.  Providers cannot change the terms.

 I have also heard that the RPI increase may be subject to a cap.  

There are some indexed annuities that have a cap but it is not the norm on conventional non-investment backed annuities.

There are a bunch of options you can select (or not) when pricing annuities.

You should also considered fixed indexation but compare the breakeven points as typically, you find using sensible or safe assumptions give the indexed annuity or long term breakeven point compared to alternatives.  (often in your 90s). 

QrizB

TheGreenFrog said:

I am considering buying an RPI-linked annuity with part of my pension fund.  I am at early stage but wonder whether the RPI reference point is for the life of the annuity or, like linkers, will change to CPI in the future?

Per this page, it seems that the Govt's intention is/was revise the calculation of RPI to align it with CPIH, such that the two measures become indistinguishable:

https://actuaries.blog.gov.uk/2021/08/23/measures-of-price-inflation-rpi-cpi-and-cpih/

So your annuity will still be linked to RPI, but RPI will equl CPIH.

At the time that page was written, that intention was being challenged in the courts.

DRS1

I bought an annuity in 2024.  One of the options I considered was an annuity with index linked increases.  The standard for that was RPI with no cap.  In fact it was harder to find one with a cap - I tried for what I think of as LPI increases (RPI capped at 5% pa) and some insurers just weren't quoting for that.
I confess I did not like the thought that with an RPI linked annuity the annuity could actually go down! I checked and RPI had it seems gone down once in the last 20 years.
I did not read anything about what happens if RPI is not around any more.  I assume there would be wording about using the nearest equivalent index.

SnowMan

QrizB said:

TheGreenFrog said:

I am considering buying an RPI-linked annuity with part of my pension fund.  I am at early stage but wonder whether the RPI reference point is for the life of the annuity or, like linkers, will change to CPI in the future?

Per this page, it seems that the Govt's intention is/was revise the calculation of RPI to align it with CPIH, such that the two measures become indistinguishable:

https://actuaries.blog.gov.uk/2021/08/23/measures-of-price-inflation-rpi-cpi-and-cpih/

So your annuity will still be linked to RPI, but RPI will equl CPIH.

At the time that page was written, that intention was being challenged in the courts.The challenge you mention in the Courts failed in 2030. The judicial review is mentioned in this article which has a link to the summary of the judgement

Yes that's right.

The judicial review took place in 2022 and essentially confirmed that the realignment of RPI to CPIH methodology was permissible. See this article.

https://www.professionalpensions.com/news/4055653/updated-court-dismisses-judicial-review-decision-replace-rpi

That's why it is my understanding that an annuity guaranteed to increase by RPI (uncapped) will effectively increase by CPIH after 2030 because that will be the basis of RPI post 2030.

zagfles

SnowMan said:

QrizB said:

TheGreenFrog said:

I am considering buying an RPI-linked annuity with part of my pension fund.  I am at early stage but wonder whether the RPI reference point is for the life of the annuity or, like linkers, will change to CPI in the future?

Per this page, it seems that the Govt's intention is/was revise the calculation of RPI to align it with CPIH, such that the two measures become indistinguishable:

https://actuaries.blog.gov.uk/2021/08/23/measures-of-price-inflation-rpi-cpi-and-cpih/

So your annuity will still be linked to RPI, but RPI will equl CPIH.

At the time that page was written, that intention was being challenged in the courts.The challenge you mention in the Courts failed in 2030. The judicial review is mentioned in this article which has a link to the summary of the judgement

Yes that's right.

The judicial review took place in 2022 and essentially confirmed that the realignment of RPI to CPIH methodology was permissible. See this article.

https://www.professionalpensions.com/news/4055653/updated-court-dismisses-judicial-review-decision-replace-rpi

That's why it is my understanding that an annuity guaranteed to increase by RPI (uncapped) will effectively increase by CPIH after 2030 because that will be the basis of RPI post 2030.

And more from the ONS here Measuring changing prices and costs for consumers and households - Office for National Statistics

zagfles

TheGreenFrog said:

tacpot12 said:

It's not unusual for an RPI or CPI linked annuity to have a cap on the inflation increases. The insurer can't afford an open-ended committment. If you have savings you are not using to buy the annuity with, these might help you if the rate of inflation goes above the cap. 

I would think that, in theory at least, the insurers can give an uncapped CPI commitment.  They can hedge by purchasing index-linked gilts.   Duration of the gilt hedge is a mortality risk. 

Not sure you can get CPI annuities, IL gilts are linked to the RPI so that's what insurers generally use for IL annuities.