5% or RPI increases - any crystal balls?

DRS1

Last year I bought an annuity and chose 5% increases over RPI.  I had buyer's remorse pretty quickly - second guessing myself.
So this year I am buying another annuity and have the same choice 5% or RPI.  I am tempted to pick RPI this time.  The starting annuity is nearly 15% higher with RPI than with 5%.
How would people decide which one to choose?
Just thinking it would be interesting to have one of each doesn't seem like a sensible basis to decide.

As a detail, last year I did look at historic RPI over the last 20 years and saw that it had exceeded 5% in three of those years.

In terms of working out a cross over point what rate of RPI would people assume?  If I look at a list 
of index linked gilts there is a column for implied RPI which seems to hover around the 3.1/3.2% figure but I can't believe it will stay there for the next 30 years.

Lowtrawler

You've said it yourself - you would need a crystal ball to know which is better financially. Perhaps more importantly is what you are trying to achieve?

Choosing RPI increases cushions you from inflation impacts to the average person. If you spend on things the average person spends on, your buying power will remain constant over the life of the annuity.

By choosing 5% increases, you either are gambling on RPI being lower than 5% or you have a specific spend pattern which you know will increase annually by 5%.

It doesn't sound like you're a gambler and so do you have a spend pattern of 5% annual increases? If not, RPI would appear to be a more sensible choice.

kempiejon

Well, being half right would be do the opposite of last time.

I have looked only occasionally and generally dismissed annuities not for for my needs.

I'll not make a call on inflation only that it could be much higher than anyone predicted and any recent begin times are not a useful indicator.

FIREDreamer

I considered 5% increases both times but in the end I went with uncapped RPI on both my annuities (2023 and 2025) as the starting income point was a lot higher and RPI seems a more logical increase in income than 5%.

pterri

kempiejon said:

Well, being half right would be do the opposite of last time.

I have looked only occasionally and generally dismissed annuities not for for my needs.

I'll not make a call on inflation only that it could be much higher than anyone predicted and any recent begin times are not a useful indicator.

If I didn’t have a chunky DB due (with RPI, 5% max indexation) I’d trade some of my SIPP for an RPI anuity. Security has to be the basis of pension planning? Unless you have a large enough sum. I’m very risk averse though 

FIREDreamer

pterri said:

kempiejon said:

Well, being half right would be do the opposite of last time.

I have looked only occasionally and generally dismissed annuities not for for my needs.

I'll not make a call on inflation only that it could be much higher than anyone predicted and any recent begin times are not a useful indicator.

If I didn’t have a chunky DB due (with RPI, 5% max indexation) I’d trade some of my SIPP for an RPI anuity. Security has to be the basis of pension planning? Unless you have a large enough sum. I’m very risk averse though 

I had 2 DB pensions which covered the personal allowance but decided to annuitise anyway …

(1) I retired last year and wanted it to be secure than rely on a dodgy 4% rule (annuity rate exceeds this)
(2) I monitored annuity rates during 2025 and found a sweet spot in May and annuitised the rest
(3) My wife couldn’t deal with drawdown and an investment portfolio for retirement income
(4) I have a S&S ISA and no cash ISA for growth
(5) Annuitising takes my pension pot out of scope of inheritance tax

kempiejon

pterri said:

kempiejon said:

Well, being half right would be do the opposite of last time.

I have looked only occasionally and generally dismissed annuities not for for my needs.

I'll not make a call on inflation only that it could be much higher than anyone predicted and any recent begin times are not a useful indicator.

If I didn’t have a chunky DB due (with RPI, 5% max indexation) I’d trade some of my SIPP for an RPI anuity. Security has to be the basis of pension planning? Unless you have a large enough sum. I’m very risk averse though 

I guess it depends on the rates offered for an annuity. I think I can build a rising income stream and security without capped indexation. If I had a chunky DB I'd plan differently. If I didn't take risks I'd never be able to afford the retirement as early and comfortable as is my want.
As I said it's not for me, perhaps if my circumstance change. Suppose I'm lucky I can change my mind; once the money is annuitised it's one way.

Pipthecat

Was there a significant cost difference?

DRS1

Pipthecat said:

Was there a significant cost difference?

Yes.  As I mentioned the starting annuity with RPI is about 15% more than the starting annuity with 5% increases.  I put it that way because I am using a set amount of money to buy the annuity.  

Last year the difference was about 10%.

DRS1

Lowtrawler said:

You've said it yourself - you would need a crystal ball to know which is better financially. Perhaps more importantly is what you are trying to achieve?

Choosing RPI increases cushions you from inflation impacts to the average person. If you spend on things the average person spends on, your buying power will remain constant over the life of the annuity.

By choosing 5% increases, you either are gambling on RPI being lower than 5% or you have a specific spend pattern which you know will increase annually by 5%.

It doesn't sound like you're a gambler and so do you have a spend pattern of 5% annual increases? If not, RPI would appear to be a more sensible choice.

I am the sort of gambler who bets on the favourite in a two horse race and watches it lose.

It looks like RPI is the favourite in this two horse race.

Personally I don't believe RPI represents a true inflation rate (certainly not my personal rate) but that is just gut feel not based on any facts.

I am also conscious that there will be a change to RPI which I perceive as a devaluing of it.  Again just a gut feel that any form of CPI is less than RPI.  No facts involved.

Albermarle

 If I look at a list 
of index linked gilts there is a column for implied RPI which seems to hover around the 3.1/3.2% figure but I can't believe it will stay there for the next 30 years.

So what you are saying is that the combined wisdom of the financial markets is wrong ?
They might be, but probably more likely to be right than you or I .