deciding what indexation to use. help me please

greenelephant_2

DavidLaGuardia wrote: »

RPI refers to Retail Price Index which is a measure of UK price inflation based on a basket of goods and services. It is the figure used on the news and other things to refer to "inflation"

NAEI is the National; average earnings index. In a growing economy this tends to be bigger than actual inflation as people get more financially better off. Pensioners often complain that the state pension goes up by RPI rather than NAEI which makes their pension progressively less in relation to everyone else.

Above is a quote from another thread regarding indexations. I am thinking of taking out a pension in the next few weeks and I need some help. I am unsure of what indexation to base my pension on. Judging on the situation of the world economy and markets am i right in thinking that perhaps a pension based on NAEI isnt as wise as basing it on RPI. I not sure, can I change the indexation as and when throughout the duration of the pension plan?

MrChips

Assuming you are talking about purchasing an annuity, I would be very surprised if you can index it against anything other than RPI.

The insurance company will need to back the payments against suitably matching investments. As yet you can get index-linked bonds (coupons linked to RPI) but not NAE-linked bonds.

The alternative is to get an annuity that goes up at a fixed rate, eg 3% pa. But if inflation hits 10%, your annuity will fall behind...

I'm pretty sure you won't be able to change the increase rate once the pension has commenced.

greenelephant_2

ok. well in more detail. the provider is scottish widows. Im after a stakeholder pension and they have 3 indexations

Fixed rate of 6%
RPI and;
NAEI.

What I would like to know is a bit more about these indexations, how they work and which is the best one to choose in consideration of our worrying economic forecast.

jem16

Indexation of a pension only happens once the pension has commenced - i.e. after you have retired or in some cases a final salary pension that you are no longer contributing to.

What I think you're looking at is starting to invest for that pension. So indexation is nothing to do with what you want. What will matter to you is the funds you choose inside your stakeholder. These will decrease or increase over the years.

greenelephant_2

ah ok. Thanks for the information. Now that I understand how and why it works the only thing now is which one is best recommended for when I retire? Im dont have much knowledge of pensions im afraid


P.S is the age I select to retire fixed as well in the pension plan?

jem16

greenelephant wrote: »

ah ok. Thanks for the information. Now that I understand how and why it works the only thing now is which one is best recommended for when I retire? Im dont have much knowledge of pensions im afraid

That's not something you ned to worry about now. When the time comes to llok at an annuity with your pension fund you can choose what is best then. You don't have to take an annuity from the provider of your pension fund.

P.S is the age I select to retire fixed as well in the pension plan?

Most modern pensions now are flexible in the retirement date. There was another thread that discussed that recently - have a look.

http://forums.moneysavingexpert.com/showthread.html?t=809591

Retired_I.F.A.

I think everyone is off track a bit here. Isn't the indexation your talking about related to the contribution not the annuity ?

jem16

Retired_I.F.A. wrote: »

I think everyone is off track a bit here. Isn't the indexation your talking about related to the contribution not the annuity ?

You may be correct in that indexation can be referring to how much to increase your contribution by each year.

However I didn't get the impression that was what was meant by the OP when he/she was talking about the "worrying economic forecast".

I may of course be barking up the wrong tree, so to speak.

greenelephant_2

yes sorry. I was talking about my contributions to the pension scheme

davey9998

its up to you - if you can afford 6% then that is best for you in the long term!

greenelephant_2

can I or an IFA change the indexation whilst I my pension is still active (before annuity) as and when I need to