Annuity 5% increase per year or RPI

SouthCoastBoy

I'm thinking an annuity will be the way to go for one of my SIPPS (currently around 360k). I don't intend to take the tax free element (or maybe I should?), so 100% will be used to buy the annuity. 

if I do buy an annuity my conundrum is do I get a 5% escalation or an RPI? If the BoE target is inflation target is met, or thereabouts (i.e. 3% or below) it seems the 5% escalation over the long term may be a better bet? Appreciate we had a spike of 10%+ inflation but when averaged out over 20 years would a 5% increase per year been more lucrative?

tacpot12

If you are buying an annuity, you are doing so for security, not to make money, so you should take the RPI option as this covers you whatever happens. 

Notepad_Phil

Personally I remember the seventies so I'd only ever go for a RPI annuity, but if you're in two minds and have other means to cover rampant inflation or can reduce your expenditure if needed then you could always purchase two annuities and mix and match types as you wish - given that from other posters it seems there's very little difference in percentage terms from purchasing an annuity with a lot of money or quite a bit less money.

As to using 100% of the pension, is that possible and if it is possible would it be tax-efficient - maybe one for dunstonh?

dunstonh

Annuity 5% increase per year or RPI

Nobody can answer as to which will be the best option as it requires predicting the unpredictable.

I don't intend to take the tax free element (or maybe I should?

Your IFA will recommend you take the TFC and use it for a PLA.  If you don't use an IFA then they wont advise you but you will be out of pocket.

if I do buy an annuity my conundrum is do I get a 5% escalation or an RPI? If the BoE target is inflation target is met, or thereabouts (i.e. 3% or below) it seems the 5% escalation over the long term may be a better bet?

The BoE target is obsolete in its current form as it was set in a different world.  Globalisation and steady and stable supply lines kept inflation low.   The world is different now.    Plus, most Governments need inflation to erode the real terms value of debt.   So, I would not be surprised to see the target revised at some point.

UK average is around 4.9% p.a. but it historically comes in spikes before settling again.

Appreciate we had a spike of 10%+ inflation but when averaged out over 20 years would a 5% increase per year been more lucrative?

Depends on the spike.   Most of the 70s was spent over 10% a year, with it peaking at 26.3% in 1975.

The bottom line is that RPI is the safe option as it gives you certainty.   5% could give you more, but it could give you less.   You get reduced certainty with 5% and you may have to reflect that in your other investments.

SouthCoastBoy

dunstonh said:

Annuity 5% increase per year or RPI

Nobody can answer as to which will be the best option as it requires predicting the unpredictable.

I don't intend to take the tax free element (or maybe I should?

Your IFA will recommend you take the TFC and use it for a PLA.  If you don't use an IFA then they wont advise you but you will be out of pocket.

if I do buy an annuity my conundrum is do I get a 5% escalation or an RPI? If the BoE target is inflation target is met, or thereabouts (i.e. 3% or below) it seems the 5% escalation over the long term may be a better bet?

The BoE target is obsolete in its current form as it was set in a different world.  Globalisation and steady and stable supply lines kept inflation low.   The world is different now.    Plus, most Governments need inflation to erode the real terms value of debt.   So, I would not be surprised to see the target revised at some point.

UK average is around 4.9% p.a. but it historically comes in spikes before settling again.

Appreciate we had a spike of 10%+ inflation but when averaged out over 20 years would a 5% increase per year been more lucrative?

Depends on the spike.   Most of the 70s was spent over 10% a year, with it peaking at 26.3% in 1975.

The bottom line is that RPI is the safe option as it gives you certainty.   5% could give you more, but it could give you less.   You get reduced certainty with 5% and you may have to reflect that in your other investments.

thks, useful info about the pla, and also the long term uk inflation average. i'm thinking rpi may be more suitable for me. When rpi is abolished do you know what index they will be using for annuities, is it cpih?

Linton

SouthCoastBoy said:

dunstonh said:

Annuity 5% increase per year or RPI

Nobody can answer as to which will be the best option as it requires predicting the unpredictable.

I don't intend to take the tax free element (or maybe I should?

Your IFA will recommend you take the TFC and use it for a PLA.  If you don't use an IFA then they wont advise you but you will be out of pocket.

if I do buy an annuity my conundrum is do I get a 5% escalation or an RPI? If the BoE target is inflation target is met, or thereabouts (i.e. 3% or below) it seems the 5% escalation over the long term may be a better bet?

The BoE target is obsolete in its current form as it was set in a different world.  Globalisation and steady and stable supply lines kept inflation low.   The world is different now.    Plus, most Governments need inflation to erode the real terms value of debt.   So, I would not be surprised to see the target revised at some point.

UK average is around 4.9% p.a. but it historically comes in spikes before settling again.

Appreciate we had a spike of 10%+ inflation but when averaged out over 20 years would a 5% increase per year been more lucrative?

Depends on the spike.   Most of the 70s was spent over 10% a year, with it peaking at 26.3% in 1975.

The bottom line is that RPI is the safe option as it gives you certainty.   5% could give you more, but it could give you less.   You get reduced certainty with 5% and you may have to reflect that in your other investments.

thks, useful info about the pla, and also the long term uk inflation average. i'm thinking rpi may be more suitable for me. When rpi is abolished do you know what index they will be using for annuities, is it cpih?

AIUI RPI will remain but the calculation method will be changed to that for CPI(H?) so the value will be the same. This will avoid hassle if RPI is explicitly stated in legal documents.

Bostonerimus1

An annuity isn't an investment, it's a longevity insurance policy to guarantee you lifetime income. Insurance mitigates risk and so I would go with RPI as that makes sure your income keeps up with inflation.

DRS1

Just to say 5% will be more expensive so if you want a lower starting annuity (eg to keep under a tax threshold) then go for 5%.

Johnnyboy11

According to the below Briefing Note, for most private sector DB schemes in payment, there is a statutory cap on indexation, currently 2.5%:

https://commonslibrary.parliament.uk/research-briefings/sn05656/

Andy_L

Johnnyboy11 said:

According to the below Briefing Note, for most private sector DB schemes in payment, there is a statutory cap on indexation, currently 2.5%:

https://commonslibrary.parliament.uk/research-briefings/sn05656/

its a statutory minimum, not a cap

DRS1

Andy_L said:

Johnnyboy11 said:

According to the below Briefing Note, for most private sector DB schemes in payment, there is a statutory cap on indexation, currently 2.5%:

https://commonslibrary.parliament.uk/research-briefings/sn05656/

its a statutory minimum, not a cap

If you are both talking about LPI it is a cap.