RPI - linked annuity

OldScientist

zagfles 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.

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. 

This is why considering income from annuities as part of an overall plan is a more thorough approach. For example,

1) Fully inflation protected income from SP, DB pension, and RPI annuity.
2) Inflation capped DB pensions. Very roughly, historically for the UK, £1000 of DB income is worth about £700 real for a 2.5% cap and £800 real for a 5% cap (there are a lot of assumptions there that I'm not going to unpick here).
3) Income from portfolio which if 'constant dollar' (i.e., so-called 'safe' withdrawal rates) is reliable in the amount but unreliable in the length of time it will pay, while dynamic withdrawals are unreliable in the amount paid but will probably last a lifetime.

One approach ('floor and upside') is to generate an inflation protected floor to cover essential (or 'core') spending and to use dynamic withdrawals from the portfolio to generate income to cover the discretionary ('adaptive') spending. Whether a level annuity could then replace some of the portfolio is a matter of taste (personally, not to mine).

Finally, for those with a legacy motive, in a floor and upside strategy that is only going to be fulfilled from the portfolio (and property).

Cobbler_tone

Not forgetting what drives RPI, much of which won't impact as many people in retirement. Food and utility bills will but mortgage/rent costs won't for everyone. Not forgetting that many will have oodles of savings which will attract higher interest rates during high inflation. You can almost high the collective groan when interest rates get dropped on other areas of this forum!

If you are on the breadline it is clearly more important.

OldScientist

westv 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.

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

Agreed, but the text does in a generic way. What the charts can do is then be applied against personal circumstances since those can be very different. To take two (extreme) cases.

1) A single retiree with an annual expenditure of £30k and fully inflation protected income (SP and DB) of £25k and a portfolio of £380k could pretty well do anything they like (no annuity, level annuity, RPI annuity) and still meet their needs.

2) A single retiree with an annual expenditure of £30k and fully inflation protected income (SP) of £12k and a portfolio of £380k could a) currently buy an RPI annuity with £380k (leaving £0k) and meet their lifetime income requirements, b) buy a level annuity with £225k and use income from the remaining portfolio (£155k) to top up the income (or purchase further annuities in the future), or c) take 4.7% inflation adjusted withdrawals from their portfolio.

a) would work except in the case of government default (insurance company failure is covered)
b) might work except where inflation was high towards the start of retirement (i.e., like the 1970 example) and the portfolio returns were low.
c) Will depend on portfolio sequence of returns and longevity, but is a bit doubtful from the historical perspective.

Of course, this assumes a requirement for a constant level of real expenditure.

MyRealNameToo

Cobbler_tone said:

Not forgetting what drives RPI, much of which won't impact as many people in retirement. Food and utility bills will but mortgage/rent costs won't for everyone. 

If you look at the difference between CPI and RPI for which a key difference is the exclusion of housing costs in the former on average there has been a 0.7% difference of which 0.6% is down to mortgage interest payments. Given inflation over the same period was about 3% its a notable proportion but a significant minority compared to other matters which will impact pensioners. 

The fact that CPI has been higher than RPI at times also demonstrates that the mortgage interest movements can be negative as well as positive so pensioners are more exposed at those times than others. 

westv

OldScientist said:

westv 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.

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

Agreed, but the text does in a generic way. What the charts can do is then be applied against personal circumstances since those can be very different. To take two (extreme) cases.

I was referring more to the total income received from the annuity over the period in question.

zagfles

MyRealNameToo said:

Cobbler_tone said:

Not forgetting what drives RPI, much of which won't impact as many people in retirement. Food and utility bills will but mortgage/rent costs won't for everyone. 

If you look at the difference between CPI and RPI for which a key difference is the exclusion of housing costs in the former on average there has been a 0.7% difference of which 0.6% is down to mortgage interest payments. Given inflation over the same period was about 3% its a notable proportion but a significant minority compared to other matters which will impact pensioners. 

The fact that CPI has been higher than RPI at times also demonstrates that the mortgage interest movements can be negative as well as positive so pensioners are more exposed at those times than others. 

Where do you this from? RPI is usually higher than CPI because of the calculation metholodgy. CPIH which includes housing costs is similar to CPI over the long term. 

zagfles

Cobbler_tone said:

Not forgetting what drives RPI, much of which won't impact as many people in retirement. Food and utility bills will but mortgage/rent costs won't for everyone. Not forgetting that many will have oodles of savings which will attract higher interest rates during high inflation. You can almost high the collective groan when interest rates get dropped on other areas of this forum!

If you are on the breadline it is clearly more important.

Stuff like food, domestic fuel, water, council tax etc tend to rise faster than general inflation. Just check how much water has risen this year. Look at how much you were paying in council tax, gas, electric, water etc 20 years ago. 

For most of the last couple of decades inflation has been higher than interest rates. 

zagfles

westv said:

OldScientist said:

westv 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.

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

Agreed, but the text does in a generic way. What the charts can do is then be applied against personal circumstances since those can be very different. To take two (extreme) cases.

I was referring more to the total income received from the annuity over the period in question.

But who cares, if that's important to you don't use an annuity. It's not what they're for. 

westv

zagfles said:

westv said:

OldScientist said:

westv 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.

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

Agreed, but the text does in a generic way. What the charts can do is then be applied against personal circumstances since those can be very different. To take two (extreme) cases.

I was referring more to the total income received from the annuity over the period in question.

But who cares, if that's important to you don't use an annuity. It's not what they're for. 

If you are going to compare a level v RPI over a period of time, then surely the total income received is just as important as comparing the annual income and the effects of inflation in that period.

Secret2ndAccount

zagfles said:

But who cares, if that's important to you don't use an annuity. It's not what they're for. 

Agreed. I like OldScientist's charts, and it's easy to eyeball and see when the RPI annuity total overtakes the level one. For academic interest it would be good to calculate an inflation-adjusted total, since a 1980's £ is worth a lot less than a 1970's £.  However, none of that matters. Buying an annuity is essentially like buying bonds. If you are seeking the biggest return, then you should be buying equities - trading more risk for more reward. An annuity is a low risk product. It offers a guaranteed income of some form, but is unlikely to offer the highest returns over a long period. It lives at the fear end of the spectrum, not the greed end.