RPI - linked annuity

zagfles

Bostonerimus1 said:

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.

Yeah, personal inflation. The main drivers of inflation are stuff like energy, food etc, ie essentials. In 1970 a loaf of bread was 9p in 1980 it was 33p. Domestic energy prices went up more, about 500%.

Bostonerimus1

zagfles said:

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. 

Obviously it's best to plan for the worst and hope for the best. I just point out that the inflation corrected amount a retiree spends each year often falls in the first couple of decades, in the US studies put that drop at 1% or 2% a year, before actually increasing again towards the end of life as care costs hit - it's another variable in the modeling. 

zagfles

Bostonerimus1 said:

zagfles said:

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. 

Obviously it's best to plan for the worst and hope for the best. I just point out that the inflation corrected amount a retiree spends each year often falls in the first couple of decades, in the US studies put that drop at 1% or 2% a year, before actually increasing again towards the end of life as care costs hit - it's another variable in the modeling. 

So you might want a product where real income reduces 1 or 2% a year. It's almost certain a flat annuity wouldn't achieve that. A better product would be an annuity which falls in real terms relative to inflation eg RPI minus 2%. 

FIREDreamer

zagfles said:

Bostonerimus1 said:

zagfles said:

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. 

Obviously it's best to plan for the worst and hope for the best. I just point out that the inflation corrected amount a retiree spends each year often falls in the first couple of decades, in the US studies put that drop at 1% or 2% a year, before actually increasing again towards the end of life as care costs hit - it's another variable in the modeling. 

So you might want a product where real income reduces 1 or 2% a year. It's almost certain a flat annuity wouldn't achieve that. A better product would be an annuity which falls in real terms relative to inflation eg RPI minus 2%. 

As the inflation target is 2%, allegedly, a level annuity would do RPI-2% (on average).

zagfles

FIREDreamer said:

zagfles said:

Bostonerimus1 said:

zagfles said:

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. 

Obviously it's best to plan for the worst and hope for the best. I just point out that the inflation corrected amount a retiree spends each year often falls in the first couple of decades, in the US studies put that drop at 1% or 2% a year, before actually increasing again towards the end of life as care costs hit - it's another variable in the modeling. 

So you might want a product where real income reduces 1 or 2% a year. It's almost certain a flat annuity wouldn't achieve that. A better product would be an annuity which falls in real terms relative to inflation eg RPI minus 2%. 

As the inflation target is 2%, allegedly, a level annuity would do RPI-2% (on average).

 
Good one. I have a target to run a marathon in 3 hours. I reckon I'll get closer to my target than the BoE. RPI was above 10% for most of 2022 & 2023. Average over the last 10 years was 4.4%, and over the last 20 years 3.7%.

To be fair on the BoE, they can't control external factors that make missing their target by a massive margin inevitable. It would be like expecting me to run a 3 hour marathon uphill in the Sahara. Nobody knows whether the economic and political environment will result in high inflation which nobody even the BoE can do anything about. Like in the 1970s, it wouldn't have helped having a target. 

MK62

Pedantic perhaps but the BoE inflation target is 2% CPI.....RPI isn't a factor.

Also, most people already have an "index linked" income source (currently triple locked) to cover the essentials in retirement.......the state pension, so a level annuity might be an option for someone who believes their spending will reduce as they age, and who wants to maximise income earlier in their retirement........it doesn't need to be either/or though, you can have both, say 50% level and 50% index linked (or whatever % suits). I'm not saying anyone should go for a level annuity, or an index linked version....just that there are options which may or may not fit, depending on the individual's circumstances.

As a further aside, the new state pension, even triple locked, has not kept pace with RPI since 2016 (when the NSP was intoduced).......if it had, it would be c.£11920 this tax year, as opposed to the actual level of £11502.
It has however outpaced CPI........if locked to CPI, it would be c.£10784 this tax year.
Just shows there's inflation.....and there's inflation.....

Bostonerimus1

MK62 said:

Pedantic perhaps but the BoE inflation target is 2% CPI.....RPI isn't a factor.

Also, most people already have an "index linked" income source (currently triple locked) to cover the essentials in retirement.......the state pension, so a level annuity might be an option for someone who believes their spending will reduce as they age, and who wants to maximise income earlier in their retirement........it doesn't need to be either/or though, you can have both, say 50% level and 50% index linked (or whatever % suits). I'm not saying anyone should go for a level annuity, or an index linked version....just that there are options which may or may not fit, depending on the individual's circumstances.

As a further aside, the new state pension, even triple locked, has not kept pace with RPI since 2016 (when the NSP was intoduced).......if it had, it would be c.£11920 this tax year, as opposed to the actual level of £11502.
It has however outpaced CPI........if locked to CPI, it would be c.£10784 this tax year.
Just shows there's inflation.....and there's inflation.....

My point was mostly to point out the good news that most people's spending doesn't simply compound every year with inflation and that's something to consider when planning. Of course when politicians are mentioning means testing of the triple lock buying an indexed annuity might be a prudent move.

westv

Bostonerimus1 said:

MK62 said:

Pedantic perhaps but the BoE inflation target is 2% CPI.....RPI isn't a factor.

Also, most people already have an "index linked" income source (currently triple locked) to cover the essentials in retirement.......the state pension, so a level annuity might be an option for someone who believes their spending will reduce as they age, and who wants to maximise income earlier in their retirement........it doesn't need to be either/or though, you can have both, say 50% level and 50% index linked (or whatever % suits). I'm not saying anyone should go for a level annuity, or an index linked version....just that there are options which may or may not fit, depending on the individual's circumstances.

As a further aside, the new state pension, even triple locked, has not kept pace with RPI since 2016 (when the NSP was intoduced).......if it had, it would be c.£11920 this tax year, as opposed to the actual level of £11502.
It has however outpaced CPI........if locked to CPI, it would be c.£10784 this tax year.
Just shows there's inflation.....and there's inflation.....

My point was mostly to point out the good news that most people's spending doesn't simply compound every year with inflation and that's something to consider when planning. Of course when politicians are mentioning means testing of the triple lock buying an indexed annuity might be a prudent move.

The only place I have read about means testing the SP is on here.

MK62

Bostonerimus1 said:

MK62 said:

Pedantic perhaps but the BoE inflation target is 2% CPI.....RPI isn't a factor.

Also, most people already have an "index linked" income source (currently triple locked) to cover the essentials in retirement.......the state pension, so a level annuity might be an option for someone who believes their spending will reduce as they age, and who wants to maximise income earlier in their retirement........it doesn't need to be either/or though, you can have both, say 50% level and 50% index linked (or whatever % suits). I'm not saying anyone should go for a level annuity, or an index linked version....just that there are options which may or may not fit, depending on the individual's circumstances.

As a further aside, the new state pension, even triple locked, has not kept pace with RPI since 2016 (when the NSP was intoduced).......if it had, it would be c.£11920 this tax year, as opposed to the actual level of £11502.
It has however outpaced CPI........if locked to CPI, it would be c.£10784 this tax year.
Just shows there's inflation.....and there's inflation.....

My point was mostly to point out the good news that most people's spending doesn't simply compound every year with inflation and that's something to consider when planning, especially when politicians are mentioning means testing of the triple lock.

I agree......my point was really just that a level annuity might be a valid option for some, depending on circumstances.

Bostonerimus1

westv said:

Bostonerimus1 said:

MK62 said:

Pedantic perhaps but the BoE inflation target is 2% CPI.....RPI isn't a factor.

Also, most people already have an "index linked" income source (currently triple locked) to cover the essentials in retirement.......the state pension, so a level annuity might be an option for someone who believes their spending will reduce as they age, and who wants to maximise income earlier in their retirement........it doesn't need to be either/or though, you can have both, say 50% level and 50% index linked (or whatever % suits). I'm not saying anyone should go for a level annuity, or an index linked version....just that there are options which may or may not fit, depending on the individual's circumstances.

As a further aside, the new state pension, even triple locked, has not kept pace with RPI since 2016 (when the NSP was intoduced).......if it had, it would be c.£11920 this tax year, as opposed to the actual level of £11502.
It has however outpaced CPI........if locked to CPI, it would be c.£10784 this tax year.
Just shows there's inflation.....and there's inflation.....

My point was mostly to point out the good news that most people's spending doesn't simply compound every year with inflation and that's something to consider when planning. Of course when politicians are mentioning means testing of the triple lock buying an indexed annuity might be a prudent move.

The only place I have read about means testing the SP is on here.

Badenoch mentioned considering means testing elements of SP on LBC last Thursday. I don't think you'll hear it again as she got push back from her MPs. But if you are a compulsive planner you might look at a scenario where you lose the triple lock and then an index linked private annuity might be very useful. However, you have to be careful to know when prudence is replaced by paranoia.