Annuity 5% increase per year or RPI

FIREDreamer

DRS1 said:

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.

And the RPI cap is 2.5% for benefits accrued from 6 April 2005, and 5% for benefits accrued between 6 April 1997 and 5 April 2005 inclusive.

westv

What's a cap on DB pensions got to do with the OPs question? 

kermchem

My dad retired in 1985 on a company final-salary pension. A few years later (I don't remember exactly when) the company decided to wind-up the pension scheme and use the reserves to buy annuities for the retired members. Dad spent a lot of time arguing that there was enough money in the fund to buy annuities that increased by RPI, but the company / actuaries claimed there was only enough to buy 5% escalating.

RPI had been over 5% from 1970 to 1983 without a break, but was then under 5% from 1992 until 2021.My dad had 5% "forced on him", and for nearly 20 years his pension increased by more than inflation.

Don't look at what inflation has been over the last few years in deciding what sort of annuity to buy - what you really need is a crystal ball. 

But, an RPI or CPI linked annuity still buys certainty of always being able to match inflation.

SouthCoastBoy

If an annuity is increased by rpi, what fugure does it take, the month the annuity was bought or the last 12 mth average, or something else? either way you may not capture the true inflation especially if it spiked for 1 mth. 

FIREDreamer

SouthCoastBoy said:

If an annuity is increased by rpi, what fugure does it take, the month the annuity was bought or the last 12 mth average, or something else? either way you may not capture the true inflation especially if it spiked for 1 mth. 

One of my RPI annuities started in Nov 2023.

The first increase effective from Nov 2024 was 3.5% which was the August 2024 rate announced in September 2024.

I guess I find out my November 2025 increase tomorrow, Hopefully it is around the 4.8% announced last month for July 2025. It could be even more.

Andy_L

DRS1 said:

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.

its the minimum maximum (or possibly the maximum minimum ;-)  )

by law they have to provide inflation linked indexation up to a maximum of 2.5% (5% for pension accrued before X date?)

but that level of indexation is the minimum they have to provide. They are free to offer more than that (eg unlimited inflation) ie there is no legislation that bans them from providing more than 2.5%

OldScientist

Assuming the income bought at the start is exactly sufficient for your needs then

RPI annuity
Inflation<=5%. Annuity will provide income sufficient for needs
Inflation>5%. Annuity will provide income sufficient for needs
5% escalation
Inflation<=5%. Annuity income will exceed that required for needs
Inflation>5%. Annuity income will fall below that required for needs

For the RPI annuity the real income is independent of inflation, while for the 5% escalation one outcome is nice to have, but not essential, while the other outcome is bad. Since, none of us know what inflation will do over the next few decades, the level of that risk is unknown.

As per the post of @FIREDreamer, most index linked income will have a date on which it is adjusted (e.g., April for the SP, anniversary for annuities*?) based on the annual inflation of a few months earlier. In other words, there is always a lag (even gilts have a lag of 3 months) which, from the POV of the retiree, is detrimental when inflation is increasing and a boost when inflation is falling.

* I assume (anyone know?) income from fixed escalation annuities are also adjusted annually rather than monthly.

FIREDreamer

OldScientist said:

Assuming the income bought at the start is exactly sufficient for your needs then

RPI annuity
Inflation<=5%. Annuity will provide income sufficient for needs
Inflation>5%. Annuity will provide income sufficient for needs
5% escalation
Inflation<=5%. Annuity income will exceed that required for needs
Inflation>5%. Annuity income will fall below that required for needs

For the RPI annuity the real income is independent of inflation, while for the 5% escalation one outcome is nice to have, but not essential, while the other outcome is bad. Since, none of us know what inflation will do over the next few decades, the level of that risk is unknown.

As per the post of @FIREDreamer, most index linked income will have a date on which it is adjusted (e.g., April for the SP, anniversary for annuities*?) based on the annual inflation of a few months earlier. In other words, there is always a lag (even gilts have a lag of 3 months) which, from the POV of the retiree, is detrimental when inflation is increasing and a boost when inflation is falling.

* I assume (anyone know?) income from fixed escalation annuities are also adjusted annually rather than monthly.

Annuities usually increase annually on the anniversary of their commencement. I have yet to see one that increases in any other way.

snowlaser

If you're asking "which out of 5% or RPI will give me the most money" no-one can possibly know.

If you're asking "which out of 5% or RPI will give me the best protection against inflation" then clearly it's RPI.