New data released by IFA shows Retail Price Index (RPI) need to grow at four percent for over twenty years for an RPI linked annuity to equal a level annuity.
The research conducted by Hargreaves Lansdown finds that the average inflation rates suggest that a man aged 65 years need to live till 96 year before a Retail Price Index linked annuity equals a level annuity.
The Retail Price Index needs to touch 4 percent consistently every year for an RPI linked annuity to match a level annuity by average life expectancy standards, the survey found.
However, if the inflation was recorded at a more modest three and a half percent per annum, for an RPI linked annuity to match a level annuity, a 65 year old man would require to live till 96, the report found.
“Retiring investors need to seriously consider the effect inflation will have on their income”, said Laith Khalaf, pensions analyst at Hargreaves Lansdown.
Over the last 20 years, the average headline RPI has been recorded at 2.9 percent. Barring for eight months in 2009, when the headline RPI was recorded negative, the inflation has been recorded at more than four percent since March 2010.
An annuity which escalates by a fixed three percentage points each year typically matches a level annuity by average life expectancy. However, if inflation rises beyond three percentage points, the buying power of the same annuity income gets eroded.
“A pension could be paid out over a period of 20 or 30 years, maybe more, so inflation is a significant threat”, said Mr. Khalaf.
“Importantly you don’t have to nail your flag to just one mast, you can mix and match level and escalating annuities to suit your needs”, he added, saying different annuities are required if inflation jumps beyond a certain limit.