5% or RPI increases - any crystal balls?

af1963

Each year, if RPI is below 5%: an annuity increasing by 5% pa will "win" and will gain purchasing power, but only by the (relatively small) difference between RPI and 5%. Someone with an RPI link has missed out on the income growth  they could have got with a 5% fixed increase, but still has the same purchasing power. 

If RPI goes above 5% - it's been over 10% recently, and over 25% in my lifetime - someone with a 5% fixed increase will lose purchasing power, potentially losing quite a lot.  Someone with an RPI link still has the same purchasing power.

An RPI annuity being cheaper to buy means that the market "expects" RPI to be less than 5% on average.  But you're probably not buying an annuity to cover the situation where inflation is a nice steady 3% forever.

saajan_12

If you want to take bets on the future RPI numbers, there are products for that. The point of an annuity is to provide a stable amount of income relative to your needs. 
- If you had fixed costs eg fixed rate mortgage thats your biggest expense then a set % may be better. 
- If your costs are likely to be in line with inflation (as with most people) then matching RPI may be better. 

The above is not designed to profit the most money. Instead its to make sure you're not risking being short of money compared to what you need to spend it on. 

DRS1

Albermarle said:

 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 .

I think I was hoping someone might tell me that the implied RPI column has little to do with actual RPI - or that it is just the market's read on current RPI rather than the market predicting RPI out to 30 or 50 years time.

kempiejon

DRS1 said:

Albermarle said:

 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 .

I think I was hoping someone might tell me that the implied RPI column has little to do with actual RPI - or that it is just the market's read on current RPI rather than the market predicting RPI out to 30 or 50 years time.

I was thinking that it would be handy to see that list from 30 years ago.
I see the consensus pricing is the view today of 30 year rates and of course these numbers are pushed around by markets every day, they're a useful available metric.

Cobbler_tone

Wonder how many people have enjoyed RPI increases throughout their career? I wonder what ‘damage’ would actually be done if you had say 3% protection across 25 years of retirement? Especially factoring in what you are spending your money on. Clearly depends on how tightly you have cut your cloth but would imagine the tangible difference wouldn’t be huge for most. Unless we are expecting a couple more pandemics. At 5% even less of an impact.
Cant blame anyone for going belt and braces for full peace of mind though.

DRS1

af1963 said:

Each year, if RPI is below 5%: an annuity increasing by 5% pa will "win" and will gain purchasing power, but only by the (relatively small) difference between RPI and 5%. Someone with an RPI link has missed out on the income growth  they could have got with a 5% fixed increase, but still has the same purchasing power. 

If RPI goes above 5% - it's been over 10% recently, and over 25% in my lifetime - someone with a 5% fixed increase will lose purchasing power, potentially losing quite a lot.  Someone with an RPI link still has the same purchasing power.

An RPI annuity being cheaper to buy means that the market "expects" RPI to be less than 5% on average.  But you're probably not buying an annuity to cover the situation where inflation is a nice steady 3% forever.

Pretty much sums up why I had buyer's remorse last year.

One factor I did not mention was that with an RPI linked annuity if RPI goes down (don't laugh it has happened). then your annuity goes down.

The other thing is that the increases are compounding so those little gains grow each year.  The question is whether the years of big RPI increases will be blips (like the recent couple of years) or whether they will continue for significant lengths of time (think 70s and 80s).

DRS1

Cobbler_tone said:

Wonder how many people have enjoyed RPI increases throughout their career? I wonder what ‘damage’ would actually be done if you had say 3% protection across 25 years of retirement? Especially factoring in what you are spending your money on. Clearly depends on how tightly you have cut your cloth but would imagine the tangible difference wouldn’t be huge for most. Unless we are expecting a couple more pandemics. At 5% even less of an impact.
Cant blame anyone for going belt and braces for full peace of mind though.

My feeling is that 3% is too low - but perhaps that is what inflation will be (if the market is right).

In fact I bet that if I go for the RPI increases then the BOE will hit the 2% pa target for the next 30 years!!

Decisions decisions.

michaels

FIREDreamer said:

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

How does planning inheritance for your heirs (if you have any) fit into that logic?  Assuming it is a joint life annuity whilst you spouse is protected there is no inherited pension for the next generation once you have converted it to an annuity.

DRS1

michaels said:

FIREDreamer said:

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

How does planning inheritance for your heir s(if you have any) fit into that logic.  Assuming it is a joint life annuity whilst you spouse is protected there is no inherited pension for the next generation once you have converted it to an annuity.

Pensions weren't really meant to form part of estate planning.

And we don't all have kids

Having said that there is a suggestion that you could have a long (30 year) guarantee period for your annuity and that this might not be caught by IHT if you (and your spouse, if any) died before it expired.

FIREDreamer

DRS1 said:

michaels said:

FIREDreamer said:

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

How does planning inheritance for your heir s(if you have any) fit into that logic.  Assuming it is a joint life annuity whilst you spouse is protected there is no inherited pension for the next generation once you have converted it to an annuity.

Pensions weren't really meant to form part of estate planning.

And we don't all have kids

Having said that there is a suggestion that you could have a long (30 year) guarantee period for your annuity and that this might not be caught by IHT if you (and your spouse, if any) died before it expired.

Yes I went for a long guarantee period - 10 years beyond how long my dad and both sets of grandparents lived.