Buying an annuity, why does RPI get a better output that LPI?

RogerPensionGuy

Just for information, some RPI offerings from insurance companies are indeed zero floor.

It's all very strange in my head.

I feel like I'm missing a trick somehow.

These insurance companies employ many good accountants and they must have good reasons as to why it's like this.

FIREDreamer

https://forums.moneysavingexpert.com/discussion/comment/81990502#Comment_81990502

More likely actuaries than accountants involved in annuity product pricing.

hugheskevi

Perhaps it could be that the pool of individuals purchasing LPI have shown via experience data to have a longer life expectancy than the pool purchasing RPI (that is speculation, I'm not suggesting evidence shows they have).

That seems unlikely, given adverse selection would be expected to lead to the uncapped RPI having longer life expectancy. But maybe, given I understand that historically most annuity purchases were flat-rate, the pool of LPI annuities is low and so the actuarial data less reliable and a premium attached due to the certainty.

That could be similar to how the motor insurance industry commonly produces third-party fire and theft insurance that is cheaper than third party only insurance.

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/comment/81990632#Comment_81990632

TPFT is explained by negative selection, in the same way as very high excesses, plus a much smaller pool of insurers offering it so less competitive pressure.

I doubt there is much correlation between RPI -v- LPI and life expectancy. For the annuity insurers I worked for, at least at the time, the majority of customers come from the bulk annuity space where the individual annuitant has no choice in the terms of their policy as they must replicate the DB scheme they were previously in (though channel can be a differentiator in rating).

The other quotes shown from Lansdown above are inline with expectations, I suspect there is something afoot in the quotes that you got that were made them atypical, for example the gap will be smaller with a LPI capped at 5% on RPI than a LPI capped at 2.5% based on CPI. Similarly not all insurer's RPI offering is both unfloored and uncapped, many do floor at 0 and I've seen a wide variety of caps plus uncapped