RPI - linked annuity

zagfles

Mr_Benn said:

I am looking at an Annuity (aged 64). My initial thought was to get it linked to the RPI/ CPI to allow for inflation. However, having done a bit more research, it seems that it costs quite a bit of your annual payouts to do this.  According to this article it can take up to 20 years before it becomes worth having RPI linked instead of Level.   https://moneyweek.com/personal-finance/pensions/is-it-worth-taking-out-an-inflation-linked-annuity-or-is-a-level-annuity-better-value

Of course the State Pension currently has inflation protection, and that would make  up a large percentage of my income, and my small DB has RPI protection as well. 

Of course, no one can predict the level of inflation, but its certainly given me food for thought.  
Anybody else have any thoughts on this are much welcomed. 

You've not read it properly. The 20 years quote was for 3% fixed escalation. For RPI linked it says 8 years for income to catch up and 17 years for total drawing to catch up IF RPI was 5% every year, which it won't be, that's just a guess. 

It then suggests you should "think carefully about how long you are likely to live to come to the best decision for you". Err, no. That sort of misses the point of annuities. If you want to guess your life expectancy, don't buy a product that pays out for life, buy a fixed term one.

The point of a lifetime annuity is the same as the point of insurance, it pools the "risk" of you needing more than average because you live to 100 with those who need less because they die young. If you don't want that insurance, don't buy an annuity. 

Similarly, RPI linked annuities will "insure" you against high inflation. Particularly high inflation early in retirement, it's not average inflation that matters so much as "sequence of inflation". If you don't need that "insurance" because other index linked income covers your needs, then is a flat annuity really the best option? If you're happy to take a risk because the income isn't essential, why not use drawdown invested in equities. Personally I have more faith in equities to maintain value than the £

MyRealNameToo

Mr_Benn said:

I am looking at an Annuity (aged 64). My initial thought was to get it linked to the RPI/ CPI to allow for inflation. However, having done a bit more research, it seems that it costs quite a bit of your annual payouts to do this.  According to this article it can take up to 20 years before it becomes worth having RPI linked instead of Level.   https://moneyweek.com/personal-finance/pensions/is-it-worth-taking-out-an-inflation-linked-annuity-or-is-a-level-annuity-better-value

Of course the State Pension currently has inflation protection, and that would make  up a large percentage of my income, and my small DB has RPI protection as well. 

Of course, no one can predict the level of inflation, but its certainly given me food for thought.  
Anybody else have any thoughts on this are much welcomed. 

Annuities are priced neutrally so the insurer will have the same net present value of the payments whatever features you choose based on their current view of longevity, longevity improvements and inflation. So if you lived exactly how long they think you will and inflation goes exactly how they predict the two pensions would pay out the same amount. 

Problem is we dont always live as long as is predicted and sometimes we have a lettuce for a prime minister so the reality can be different from the prediction. 

There is no right answer, some would argue they want more money today whilst they are well enough to still enjoy it but others do that and in 20 years time they are still fit as a fiddle but years of high inflation has totally eroded their pension 

RogerPensionGuy

I'm also still considering annuities or PLAs (purchased life annuity) for info. 

I did plenty research the last few years in to both types of annuities.

Reference views in this thread about flat or indexed annuities, I was thinking that if I get annuities, maybe get 2 or 3 of them as no extra costs from my research.

Maybe a flat 10 year annuity, maybe a flat life annuity and maybe an indexed life annuity, hopefully a mix would work out covering various angle. 

Notepad_Phil

Mr_Benn said:

I am looking at an Annuity (aged 64) ...
Of course, no one can predict the level of inflation, but its certainly given me food for thought.  
Anybody else have any thoughts on this are much welcomed. 

As someone of a similar age I well remember the high inflation of the seventies so if I did go the annuity route then I would never consider anything other than a rpi/cpi linked annuity for our particular needs - i.e. apart from our state pensions we only have a very small decently linked final salary pension coming in. However other people have different needs and sources of retirement income so they may be able to 'risk' periods of high inflation with equanimity.

Also is this a joint annuity? If it is then consider how would the different types of annuity suit your partner. Mrs Notepad's mother lived to her late nineties, so in our case any annuity could easily  last for 30+ years.

Mr_Benn

Thats a good question Secret.  Ive done some more sums, split things into basics, then another part for holidays / football etc.  I reckon the SP just about covers our necessities and a bit more.  
So its then looking at 'luxuries' and whether the Annuity can comfortably cover those if at a level payout. 

The one thing I havent budget for is any care / hospital bills as we get older, but I think I will drag myself down mentally if I try to do that.  We will have money in savings which we would have to use if necessary, and have plenty of equity in our house if needed be. 

OldScientist

Just to illustrate what @zagfles meant by sequence of inflation the following graph shows the real (i.e., inflation adjusted) income from a level and RPI annuity (starting income £8000 and £4700, https://www.williamburrows.com/calculators/annuity-tables/ quoted on 1 August 2025) over the 30 years following retirement in 1970 and 1990 (i.e., for a 65yo, until they would have been 95yo).



Clearly, the RPI annuity would have been a much better purchase in 1970 than it would have been in 1990, but the purchaser would not have known this at the time of purchase.

The question then comes down to what others have asked, 'what is this income for?'

If the annuity income is going to support essential expenditure (however that is defined), then buying an RPI annuity avoids what would have been a dreadful outcome in 1970, while if it is to support discretionary expenditure then the 1970 retiree who bought a level annuity would have been able to have fewer holidays, replaced their car less frequently etc., than the 1990 retiree, but their other sources of income would have put food on the table, paid the bills etc.

TheGreenFrog

OldScientist said:

Just to illustrate what @zagfles meant by sequence of inflation the following graph shows the real (i.e., inflation adjusted) income from a level and RPI annuity (starting income £8000 and £4700, https://www.williamburrows.com/calculators/annuity-tables/ quoted on 1 August 2025) over the 30 years following retirement in 1970 and 1990 (i.e., for a 65yo, until they would have been 95yo).



Clearly, the RPI annuity would have been a much better purchase in 1970 than it would have been in 1990, but the purchaser would not have known this at the time of purchase.

The question then comes down to what others have asked, 'what is this income for?'

If the annuity income is going to support essential expenditure (however that is defined), then buying an RPI annuity avoids what would have been a dreadful outcome in 1970, while if it is to support discretionary expenditure then the 1970 retiree who bought a level annuity would have been able to have fewer holidays, replaced their car less frequently etc., than the 1990 retiree, but their other sources of income would have put food on the table, paid the bills etc.

Not sure I understand these charts.  Presumably the £8k nominal and £4.7k inflation-linked annuities cost the same to purchase in 1970.  But was that also the case in 1990?  

zagfles

OldScientist said:

Just to illustrate what @zagfles meant by sequence of inflation the following graph shows the real (i.e., inflation adjusted) income from a level and RPI annuity (starting income £8000 and £4700, https://www.williamburrows.com/calculators/annuity-tables/ quoted on 1 August 2025) over the 30 years following retirement in 1970 and 1990 (i.e., for a 65yo, until they would have been 95yo).



Clearly, the RPI annuity would have been a much better purchase in 1970 than it would have been in 1990, but the purchaser would not have known this at the time of purchase.

The question then comes down to what others have asked, 'what is this income for?'

If the annuity income is going to support essential expenditure (however that is defined), then buying an RPI annuity avoids what would have been a dreadful outcome in 1970, while if it is to support discretionary expenditure then the 1970 retiree who bought a level annuity would have been able to have fewer holidays, replaced their car less frequently etc., than the 1990 retiree, but their other sources of income would have put food on the table, paid the bills etc.

As long as the "other sources of income" are fully index linked, not capped like most private sector DB pensions. If a DB pension is capped at 3% or 5% increases that's not going to protect you against high inflation. 

Also I never understand the argument that "I don't need inflation protection with my annuity because I have that with state pension/DB". That's a bit like saying I don't need travel insurance because I have house and car insurance. 

westv

OldScientist said:

Just to illustrate what @zagfles meant by sequence of inflation the following graph shows the real (i.e., inflation adjusted) income from a level and RPI annuity (starting income £8000 and £4700, https://www.williamburrows.com/calculators/annuity-tables/ quoted on 1 August 2025) over the 30 years following retirement in 1970 and 1990 (i.e., for a 65yo, until they would have been 95yo).



Clearly, the RPI annuity would have been a much better purchase in 1970 than it would have been in 1990, but the purchaser would not have known this at the time of purchase.

The question then comes down to what others have asked, 'what is this income for?'

If the annuity income is going to support essential expenditure (however that is defined), then buying an RPI annuity avoids what would have been a dreadful outcome in 1970, while if it is to support discretionary expenditure then the 1970 retiree who bought a level annuity would have been able to have fewer holidays, replaced their car less frequently etc., than the 1990 retiree, but their other sources of income would have put food on the table, paid the bills etc.

What those charts don't take account of is total income received,

OldScientist

TheGreenFrog said:

OldScientist said:

Just to illustrate what @zagfles meant by sequence of inflation the following graph shows the real (i.e., inflation adjusted) income from a level and RPI annuity (starting income £8000 and £4700, https://www.williamburrows.com/calculators/annuity-tables/ quoted on 1 August 2025) over the 30 years following retirement in 1970 and 1990 (i.e., for a 65yo, until they would have been 95yo).



Clearly, the RPI annuity would have been a much better purchase in 1970 than it would have been in 1990, but the purchaser would not have known this at the time of purchase.

The question then comes down to what others have asked, 'what is this income for?'

If the annuity income is going to support essential expenditure (however that is defined), then buying an RPI annuity avoids what would have been a dreadful outcome in 1970, while if it is to support discretionary expenditure then the 1970 retiree who bought a level annuity would have been able to have fewer holidays, replaced their car less frequently etc., than the 1990 retiree, but their other sources of income would have put food on the table, paid the bills etc.

Not sure I understand these charts.  Presumably the £8k nominal and £4.7k inflation-linked annuities cost the same to purchase in 1970.  But was that also the case in 1990?  

I've assumed current payout rates to illustrate the effect of inflation. Level annuity rates are available back to the 1950s (e.g., see Figure 4.1 in https://www.bristol.ac.uk/media-library/sites/cmpo/migrated/documents/annuitypricing.pdf ), but I'm not sure when RPI annuities were first available (index linked gilts were not available until the 1980s).