New data shows that RPI would need to average four per cent over 20 years for an inflation-linked annuity to match a level annuity.
Average inflation rates over the past twenty years suggest that a man at age 65 would need to live to 96 before an RPI-linked annuity would match a level annuity, new research has shown.
The retail price index (RPI) needs to consistently run at over four per cent per annum for an RPI-linked annuity to match a level annuity by average life expectancy, the study found.
If inflation were to run at a more modest rate of three per cent each year, a 65-year old man would need to live to 96 for an RPI-linked annuity to match a level annuity.
The headline RPI figure has in fact run at above four per cent since March 2010, but it was negative for eight months in 2009. Over the last 20 years, the average headline RPI figure was 2.9 per cent.
An annuity which escalates by a fixed percentage of three per cent typically matches a level annuity by average life expectancy. However if inflation runs above three per cent the buying power of this income will be eroded.
Retiring investors need to seriously consider the effect inflation will have on their income.
A pension could be paid out over a period of 20 or 30 years, maybe more, so inflation is a significant threat. 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.
