Annuity 5% increase per year or RPI

af1963

SouthCoastBoy said:

The added complication with RPI is the RPI could be averaging 8% per year but the RPI for the mth of the annuity increase could be , say 4%, meaning the RPI increase could be less than the average RPI for that year.

If there was a weird monthly blip like that - and it would need to be a *big* blip to have that much effect - then it would also fix the new starting point for measuring the following year's inflation, so the following year's increase would be larger, assuming that "average" inflation over the period continued at 8%.  Every increase in the index will be captured in one of the years. It's looking at what has happened over the last 12 month period as a whole.

If it's "indexed with a 5% cap" , the cap might prevent you from getting the full increase if the inflation was "lumpy" from one year to the next.  Two years at 5% better than one at 0% and one at 10% in that case.

ukdw

Cobbler_tone said:

FIREDreamer said:

Cobbler_tone said:

FIREDreamer said:

Cobbler_tone said:

P.S. that table above reminds me of one of mine on the respective ages of taking a DB pension. Seems strange to have the same starting annuity for 2.5%, 3% and 4%?
You will always net out 'worse off' at some point, but how do you value some happier years up front? Potentially priceless.

Those are RPI annuities that start at the same value (obviously) and he is making those assumptions about future RPI increases post annuity purchase.

I understand that but I'm assuming they wouldn't be the starting numbers. If they are you would take the 4% 

He is assuming future RPI from the same starting point for an RPI annuity ! Why not do a quote assuming 10%, 20% or 30% then? 🤷‍♂️

I get it. I have some very complex models projecting every eventually of a DB scheme from the ages of 55 to 65, plus varying lump sums.

I don't get the top line, if I am reading it right. Maybe it just isn't described clearly:



It suggests you can have a level annuity for life of £16,349.
Or you can have a lifetime annuity of £9,794 with 5% annual increases. I also understand adding 2.5%-4% per year but must have missed what the £11,584 is. I (wrongly) assumed they were the quotes for the annuity from the £16,349 for 2.5%-4% increases. 

My mindset has always been, if I would have been better off after 20 years I'll take the jam now. I figure that if I will be 'technically' worse off that far in the future it won't make a tangible difference to my life. Like most things, 'it depends' is usually the answer based on everyone's personal circumstances. e.g. we recently inherited a significant amount which we (rightfully) never factored into our retirement planning. 

If you are relying on your annuity and state pension pooled together to get by, then RPI protection makes sense. Always a balanced decision based on security, affordability and appetite to risk.

The figures rates I quoted were all for the same original purchase amount like my previous post of £200k - not sure if that is what the confusion is. If you put £266,666k into HL you will hopefully get similar figures for level, rpi and 5% annuities with the £200k purchase. I've then just ramped them up by a few assumed percentages for RPI or the fixed 5%.

Have updated the post to reference the £200k again in case that is what is causing the confusion.

I think however whatever original purchase amount you put in the ratios and therefore breakeven years will end up the same.

Cobbler_tone

ukdw said:

Cobbler_tone said:

FIREDreamer said:

Cobbler_tone said:

FIREDreamer said:

Cobbler_tone said:

P.S. that table above reminds me of one of mine on the respective ages of taking a DB pension. Seems strange to have the same starting annuity for 2.5%, 3% and 4%?
You will always net out 'worse off' at some point, but how do you value some happier years up front? Potentially priceless.

Those are RPI annuities that start at the same value (obviously) and he is making those assumptions about future RPI increases post annuity purchase.

I understand that but I'm assuming they wouldn't be the starting numbers. If they are you would take the 4% 

He is assuming future RPI from the same starting point for an RPI annuity ! Why not do a quote assuming 10%, 20% or 30% then? 🤷‍♂️

I get it. I have some very complex models projecting every eventually of a DB scheme from the ages of 55 to 65, plus varying lump sums.

I don't get the top line, if I am reading it right. Maybe it just isn't described clearly:



It suggests you can have a level annuity for life of £16,349.
Or you can have a lifetime annuity of £9,794 with 5% annual increases. I also understand adding 2.5%-4% per year but must have missed what the £11,584 is. I (wrongly) assumed they were the quotes for the annuity from the £16,349 for 2.5%-4% increases. 

My mindset has always been, if I would have been better off after 20 years I'll take the jam now. I figure that if I will be 'technically' worse off that far in the future it won't make a tangible difference to my life. Like most things, 'it depends' is usually the answer based on everyone's personal circumstances. e.g. we recently inherited a significant amount which we (rightfully) never factored into our retirement planning. 

If you are relying on your annuity and state pension pooled together to get by, then RPI protection makes sense. Always a balanced decision based on security, affordability and appetite to risk.

I think however whatever original purchase amount you put in the ratios and therefore breakeven years will end up the same.

It is very similar to most DB projection models with early reduction factors, although you often can't do much about RPI. i.e. many have defined 'protection' of 5%/2.5% based on different parts etc. Then of course the complexity of lump sums to consider. You have to use something for RPI so I normally use an arbitrary 3%. Regardless of when I take mine the 'break even' is after around 18-20 years. You will never know as RPI will be variable and have different compound impacts, you don't really know how you will make the earlier money work and the ultimate unknown of your expiry date. i.e. if you leave it and leave it you may never see much value from it.
My stance is the big question of whether it allows you to make the leap to retire and enjoy some priceless time when you are younger, whilst giving you adequate protection into old age. e.g. do you need to retire at 65 on £40k PA DB when you could retire at 57 on £30k PA? It's a personal decision for everyone....and you might LOVE your job.  
A lot of this translates into making a balanced decision with DC pots. I could look at mine as £500k fund but I'd never get the same value. My DC pot on top will be around a third of that, so I'll have decisions to make there.

Nebulous2

af1963 said:

10% or 20% average inflation over an entire retirement would wreck plans for millions.  Lots of DBs and annuities with fixed or capped increases would lose much of their value.

Historically it's never been that high as a long term average rate in the UK, although it got close to 10% through the 70s and 80s.  ( Trailing 20 year average annual inflation was over 9% from 1980 to 1993).  Prudent to at least consider the possibility of a repeat.  

The years below were the peak annual rates. Retire in 1970 at the beginning of that period, and by 1990 a 5% fixed increase pension or annuity would be worth almost 60% less than at the start. 

1982	8.6
1981	11.88
1980	17.97
1979	13.42
1978	8.26
1977	15.84
1976	16.56
1975	24.21
1974	16.04
1973	9.2
1972	7.07
1971	9.44
1970	6.37

I've been thinking about this. This greatly contributed to making my generation (I'm almost at the end of the babyboomers) so well off. We bought houses, with a struggle, but house price inflation quickly gave us some equity, and general inflation with decent pay rises eroded the impact of our mortgage payments. 

The losers at that time were the people living on fixed income, particularly if they were renting - primarily the older people. 

The last period, since the financial crisis has contributed to the older generation doing well. Triple lock, equity growth, pensions often outstripping wages, and the never-ending house price inflation. 

A lot of people have had a bite at both ends, gaining in the 70s / 80s and gaining again in the 2010s/ 2020s. Of course it is more nuanced than that, there have always been losers as well as winners, but generally we have had some pretty favourable times..... 

af1963

Early boomers much more so than late boomers - to benefit from the inflating-away of mortgage debt in the 70s, you needed to be already borrowing by that time. If you had a mortgage by 1975, you were born before the mid 50s. 

The downside, of course, was paying high interest rates on that mortgage, so the regular payments were a pretty high proportion of income.  ( Borrow 3x gross salary, pay 10% annual interest rate = 30% of gross income . Rising to 45% when interest rates hit 15% a couple of times).  That's what people often remember from that period, not the less immediate effects of inflation reducing the value of their fixed debt as wages and prices rose.

DRS1

I think what most people remember from back then (apart from no electricity and 1 inch of bathwater) is getting gazumped.

kinger101

DRS1 said:

I think what most people remember from back then (apart from no electricity and 1 inch of bathwater) is getting gazumped.

Bath? You were lucky to have a bath.  We used to have to share a muddy puddle in the middle of the road.

FIREDreamer

kinger101 said:

DRS1 said:

I think what most people remember from back then (apart from no electricity and 1 inch of bathwater) is getting gazumped.

Bath? You were lucky to have a bath.  We used to have to share a muddy puddle in the middle of the road.

Luxury!

etc etc etc 🤣

RogerPensionGuy

I've been digging & digging looking at annuities and I'm trying to understand how RPI to CPI may affect the deal annuity customers get from 2030. 

I guess it won't just be annuities, it will be much other stuff like DB pensions also. 

With the 2030 changes to RPI/CPI and unknown changes thereafter that I'm guessing will occur, it certainly feels to me if I'm buying an annuity that I should indeed buy at least two of them, one RPI and the other fixed % rises, I've only been playing with 3,4 & 5% rises on the quoting sites, I'm now going to see how 6 and 7% look in my head, I guess absorb very low initial payments, but it will provide a very warm feeling over the years should I get a reasonable time in that zone. 

A few links below I found interesting, so I have put them below for interest. 

Cheers Roger. 

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What impact will the change in the calculation of the Retail Price Index have on my pension? | Bectu https://share.google/7bF5F04bPQvH8569G

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Inflation-Linked Annuities Explained | Protect Your Income | Retirement Line https://share.google/zLdyZ67suxu0ByCcB

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https://www.hl.co.uk/news/webview/45yGRdxd6RtGD4R3fUqzWu

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https://youtu.be/zw1P5Uy6Xp4?si=n8f-OGSkOXq6t59w

grn99

I'm probably missing something on the incremental % v RPI etc. and this could be a stupid question, but I'll ask anyway 

With this whole which increment (if any) we choose, the pot size is finite (other than whatever investment takes place) when it's used to purchase an annuity. So to my mind, regardless of level, 3%, RPI or something else, there is only so much money the actuaries will have calculated can be afforded by them?

So whichever escalator you put yourself on (and disregarding all the other protection options), the only way that same pot can give you those increments is by reducing the start point. Using real quotes I got, one example had £20,604 as my level annual, the 3% shows the start as £14,407 and 5% shows £10,919.

After 25 years these add up to £535,704.00 £555,433.68 and £558,107.80

Future RPI is obviously an unknown but the start point was £13,127.00

To my mind, that's not a huge variance after 25 years, between the increments. The only sure thing is a low start point and less money to play with in the first 15 years and if it does  match inflation all you're doing is maintaining that low start point in real terms....unless I'm missing something (and I probably am!!). Happy to have my interpretation corrected...