RPI - linked annuity

zagfles

dunstonh said:

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). 

What are "sensible and safe" assumptions? Do they look at actual historic sequences of inflation going back 100+ years like drawdown SWRs usually do with stockmarket returns?

How would someone in 1970 have fared with a flat or fixed indexed annuity if they'd assumed the last couple of decades average inflation (around 3-4% in the 1950's and 60s) was a "sensible and safe assumption"? 

Or maybe 1970 is too long ago to worry about. But then, why not use drawdown, the SWR based on the last 50 years is around 7-8% or so, and that's with inflation increases. 

MarkCarnage

RPI will = CPI after 20230 as the methodology will be the same. 

If insurers back inflation linked annuities with index linked gilts or their derivatives (as they do) then there is no reason for them to be capped. Many DB pension schemes cap their increases to 5% or even 2.5% but that's essentially to limit the scheme liabilities and the cost of them. 

zagfles

MarkCarnage said:

RPI will = CPI after 20230 as the methodology will be the same. 

If insurers back inflation linked annuities with index linked gilts or their derivatives (as they do) then there is no reason for them to be capped. Many DB pension schemes cap their increases to 5% or even 2.5% but that's essentially to limit the scheme liabilities and the cost of them. 

CPIH to be pedantic

MarkCarnage

Indeed! Forgot the H....

AlanP_2

MarkCarnage said:

RPI will = CPI after 20230 as the methodology will be the same. 

If insurers back inflation linked annuities with index linked gilts or their derivatives (as they do) then there is no reason for them to be capped. Many DB pension schemes cap their increases to 5% or even 2.5% but that's essentially to limit the scheme liabilities and the cost of them. 

And 2030 to be clear 

Two errors in one short post Mark  

DRS1

MarkCarnage said:

RPI will = CPI after 20230 as the methodology will be the same. 

If insurers back inflation linked annuities with index linked gilts or their derivatives (as they do) then there is no reason for them to be capped. Many DB pension schemes cap their increases to 5% or even 2.5% but that's essentially to limit the scheme liabilities and the cost of them. 

and to comply with legislation.
Otherwise there would probably be no increases.

MarkCarnage

AlanP_2 said:

MarkCarnage said:

RPI will = CPI after 20230 as the methodology will be the same. 

If insurers back inflation linked annuities with index linked gilts or their derivatives (as they do) then there is no reason for them to be capped. Many DB pension schemes cap their increases to 5% or even 2.5% but that's essentially to limit the scheme liabilities and the cost of them. 

And 2030 to be clear 

Two errors in one short post Mark  

Must do better.....strictly it is also true I would point out if anyone is around to check in 18,200 years time  

MarkCarnage

DRS1 said:

MarkCarnage said:

RPI will = CPI after 20230 as the methodology will be the same. 

If insurers back inflation linked annuities with index linked gilts or their derivatives (as they do) then there is no reason for them to be capped. Many DB pension schemes cap their increases to 5% or even 2.5% but that's essentially to limit the scheme liabilities and the cost of them. 

and to comply with legislation.
Otherwise there would probably be no increases.

They would be 'discretionary' which might be no increases in some cases. 

Bostonerimus1

Something to consider are the many studies that show people tend to spend less as they age, so is a flat annuity actually better than an inflation linked annuity for matching retirement spending needs? A flat annuity also. gives more early on when day to day spending tends to be greatest. Of course there are care costs to consider as they are a common spike in late retirement spending.

in general RPI or CPI are just part of the calculation of your personal spending inflation rate which is the relevant number for your finances. This is important for both DC drawdown and annuity retirement income planning and might be a silver lining making your pots go a bit further.

zagfles

Bostonerimus1 said:

Something to consider are the many studies that show people tend to spend less as they age, so is a flat annuity actually better than an inflation linked annuity for matching retirement spending needs and a flat annuity gives more early on when day to day spending tends to be greatest. Of course there are care costs to consider as they are a common spike in late retirement spending.

And do you think that spending requirement drops in line with inflation whatever it is? Front loading spending may be sensible. Doing it using a flat annuity is a complete gamble, you don't know what it'll buy you in 20-30 years time. You still need essentials like food, energy etc regardless of whether spending on extras like holidays, nights out etc drop as you get older. 

So a much better plan would be to get an index linked annuity to cover your essentials, and use other investments or a gilts ladder etc to cover extras you want in early retirement.