RPI - linked annuity

zagfles

westv said:

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.

No, it's not important at all. It's like working out whether you'd have been better off not paying house insurance, travel insurance etc over your lifetime. A pointless academic exercise that can only be measured in hindsight, when you're dead. 

You buy an annuity to provide an income stream for life, not to attempt to maximise your lifetime earnings. If you want to do that, use a more suitable product (eg drawdown). 

westv

Secret2ndAccount said:

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. 

Define "overtakes". Is it when the annual income you receive from one exceeds the other or is it when the total income you have received exceeds the other? I suggest both are just as important. If you are going to do a comparison chart then you have to do both.

westv

zagfles said:

westv said:

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.

No, it's not important at all. It's like working out whether you'd have been better off not paying house insurance, travel insurance etc over your lifetime. A pointless academic exercise that can only be measured in hindsight, when you're dead. 

You buy an annuity to provide an income stream for life, not to attempt to maximise your lifetime earnings. If you want to do that, use a more suitable product (eg drawdown). 

Then you effectively dismissing OldScentist's charts as irrelevant.

Cobbler_tone

zagfles 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. 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. 

Depends where you want to put your line in the sand. e.g. water is cheaper than it was in 2010 with inflation applied. The Office of National Statistics' (ONS) Consumer Price Index (CPI) shows that between 1988 and 2005, the cost of food generally rose below the rate of inflation. In 2006, this changed and the cost of food rose above the rate of inflation, before dropping in 2013-14. Since 2016, food prices were on the rise again but at a lower rate than inflation (food prices went up 4.3%, whereas all inflation was 5.2%). Then there was Covid.

From my experience and from the lived experience around me, things seems to pinch in certain areas but ease off in others. e.g. it is £25 cheaper to fill my car up from the peak but that no doubt goes somewhere else.

I appreciate it is a generalisation but many pensioners (the ones who don't really need the WFA) will absorb any rises better than most. You will hear them moaning about interest rates dropping more than the price of their council tax.

Secret2ndAccount

Secret2ndAccount said:
it's easy to eyeball and see when the RPI annuity total overtakes the level one.

westv said:

Define "overtakes". Is it when the annual income you receive from one exceeds the other or is it when the total income you have received exceeds the other? I suggest both are just as important. If you are going to do a comparison chart then you have to do both.

I said 'total' in my initial comment. It's trivial to read the two graphs to see when RPI overtakes level in annual payout (1974½).  If you want to talk total, then count the pixels under the curve. It goes something like this:


When the two red areas are equal (same no of pixels) then the totals will be equal. So the RPI is ahead after 11 years approx.  
However, nobody knows today whether we are at the start of a 1970's curve or a 1990's curve. You look at the quotes and satisfy yourself that the offer between level and RPI is fair - neither product is a rip-off or a bargain compared to the other. Then you purchase the product that best matches your needs.  If your need is to match inflation, and they offer one product that matches inflation, and one that doesn't then I would strongly suggest the one that matches inflation.  If your need is for more money now (parties, holidays), and you accept that means less money later (rocking chair, fireside), then a level annuity could work for you.

zagfles

westv said:

zagfles said:

westv said:

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.

No, it's not important at all. It's like working out whether you'd have been better off not paying house insurance, travel insurance etc over your lifetime. A pointless academic exercise that can only be measured in hindsight, when you're dead. 

You buy an annuity to provide an income stream for life, not to attempt to maximise your lifetime earnings. If you want to do that, use a more suitable product (eg drawdown). 

Then you effectively dismissing OldScentist's charts as irrelevant.

What are you on about? You just complained that they didn't measure total income received, which they don't, because it's irrelevant. What they do measure is what really is relevant, ie real annual income. With an annuity it's important to account for real annual income potentially being less than a quarter of what it started at, if you buy a level annuity and there's high inflation. The charts show that clearly. 

westv

Secret2ndAccount said:

Secret2ndAccount said:
it's easy to eyeball and see when the RPI annuity total overtakes the level one.

westv said:

Define "overtakes". Is it when the annual income you receive from one exceeds the other or is it when the total income you have received exceeds the other? I suggest both are just as important. If you are going to do a comparison chart then you have to do both.

I said 'total' in my initial comment. It's trivial to read the two graphs to see when RPI overtakes level in annual payout (1974½).  If you want to talk total, then count the pixels under the curve. It goes something like this:


When the two red areas are equal (same no of pixels) then the totals will be equal. So the RPI is ahead after 11 years approx.  
However, nobody knows today whether we are at the start of a 1970's curve or a 1990's curve. You look at the quotes and satisfy yourself that the offer between level and RPI is fair - neither product is a rip-off or a bargain compared to the other. Then you purchase the product that best matches your needs.  If your need is to match inflation, and they offer one product that matches inflation, and one that doesn't then I would strongly suggest the one that matches inflation.  If your need is for more money now (parties, holidays), and you accept that means less money later (rocking chair, fireside), then a level annuity could work for you.

Pixels? I am going to have to re-read what you've written.

There are two separate issues being discussed in this thread.

A) Are you better off with a level or increasing annuity. That will depend, as you say, on what you are trying to achieve. My question isn't relevant to that.
OldScentist's graphs which compared annual income levels for a level v a RPI annuity purchased in 1970 or 1990. I was seeking an enchantment of that. 

zagfles

Cobbler_tone said:

zagfles 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. 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. 

Depends where you want to put your line in the sand. e.g. water is cheaper than it was in 2010 with inflation applied. The Office of National Statistics' (ONS) Consumer Price Index (CPI) shows that between 1988 and 2005, the cost of food generally rose below the rate of inflation. In 2006, this changed and the cost of food rose above the rate of inflation, before dropping in 2013-14. Since 2016, food prices were on the rise again but at a lower rate than inflation (food prices went up 4.3%, whereas all inflation was 5.2%). Then there was Covid.

From my experience and from the lived experience around me, things seems to pinch in certain areas but ease off in others. e.g. it is £25 cheaper to fill my car up from the peak but that no doubt goes somewhere else.

I appreciate it is a generalisation but many pensioners (the ones who don't really need the WFA) will absorb any rises better than most. You will hear them moaning about interest rates dropping more than the price of their council tax.

The illusion that inflation doesn't affect pensioners pretty much the same as everyone else is frankly delusional. There'll be minor differences but the trend is similar for everyone. There's a personal inflation calculator here, have a play and see if you can convince yourself that inflation isn't as much an issue for pensioners as everyone else. 

How is inflation affecting your household costs? - Office for National Statistics

Secret2ndAccount

westv said:
OldScentist's graphs which compared annual income levels for a level v a RPI annuity purchased in 1970 or 1990. I was seeking an enchantment of that. 

I believe I enchanted them quite helpfully. If you want to know what pixels are, you can find out here:
google.com/search?q=what+is+a+pixel

I will try again with no pixels:

The green area represents extra money that you collect by starting with the higher number from the level annuity. After 5 years, the annual income from the RPI annuity has moved ahead, and the amber area represents the gains draining away. After 11 years, the gains are all gone, and the RPI wins from there out. The red area now shows the increasing profit from choosing the RPI link in this case.
In this particular case, level annuity is about 3k up after 1 year, maybe +8k after 4½ years. That's all gone after 11 years, and level is about 15k down 5 years later. The 8k you thought you were getting with level is now worth about £1,800 in terms of what you can buy with it.
This is a particular example that favours the RPI annuity, but it demonstrates the reason you would choose one. It's insurance against periods of high inflation. Are you okay if your income drops from 8k to 1800 in 15 years?
If you believe the Bank of England, and think inflation will be 2% every year in the future, then an RPI annuity won't work out great. I note that the BofE inflation target has been 2% for as long as I can remember. The actual number, over the last 5 years and the last 50 years has averaged >4%

Cobbler_tone

zagfles said:

Cobbler_tone said:

zagfles 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. 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. 

Depends where you want to put your line in the sand. e.g. water is cheaper than it was in 2010 with inflation applied. The Office of National Statistics' (ONS) Consumer Price Index (CPI) shows that between 1988 and 2005, the cost of food generally rose below the rate of inflation. In 2006, this changed and the cost of food rose above the rate of inflation, before dropping in 2013-14. Since 2016, food prices were on the rise again but at a lower rate than inflation (food prices went up 4.3%, whereas all inflation was 5.2%). Then there was Covid.

From my experience and from the lived experience around me, things seems to pinch in certain areas but ease off in others. e.g. it is £25 cheaper to fill my car up from the peak but that no doubt goes somewhere else.

I appreciate it is a generalisation but many pensioners (the ones who don't really need the WFA) will absorb any rises better than most. You will hear them moaning about interest rates dropping more than the price of their council tax.

The illusion that inflation doesn't affect pensioners pretty much the same as everyone else is frankly delusional. There'll be minor differences but the trend is similar for everyone. There's a personal inflation calculator here, have a play and see if you can convince yourself that inflation isn't as much an issue for pensioners as everyone else. 

How is inflation affecting your household costs? - Office for National Statistics

I’m sure it impacts some. My parents are very working class with a simple life. I know for a fact my mum hasn’t spent a penny of her state pension in 25 years (she told me) and worked full time for her last 7 years and hasn’t spent any of that either. Very old school and my dad gives her housekeeping! Their income is modest but they must spend very little to run their little bungalow and shopping. They certainly don’t need the WFA. They won’t be unique.