Here’s some unexpected news for some unfortunates. If they have a RPI-linked pension annuity their income is going to drop because of deflation. Some pensioners with Standard Life or Prudential retail price index-linked (RPI- linked) pension annuity contracts will see their incomes drop by 1.2% after the Bank of England revealed that inflation has sunk further. Indeed, Partnership and Just Retirement will also reduce income payments for some customers.
Standard Life has written to advisers explaining that the recent fall in RPI to – 0.4%, announced in April, would result in a reduction in some clients’ monthly annuity payments. If the RPI is negative at the client’s annual review date, the client will receive the lower amount for all of the following twelve months. Good old Norwich Union (soon to be Aviva), Legal & General, LV= and Axa have not reduced the monthly income for their inflation-linked annuitants.
Less than 10% of annuities are inflation-linked. Some people opt for what is known as a floor option, which means they will not be affected by deflationary issues (a drop in income). Mind you, Standard Life says it has 6,000 pensioners with an RPI-linked pension annuity without a floor option while Prudential says it has 9,000 clients in a similar position.
Some experts are claiming that, despite the latest inflation figures, pensioner inflation is actually running at around 5%, and that some pensioners who bought RPI linked annuities are now really seeing their incomes shrink. It is great to see that both Axa and LV= have had a change of heart and decided to make sure that clients do not suffer from their RPI linked pension annuity incomes going down.
Inflation is a major issue for pensioners, especially in the medium term and those about to retire should give serious thought to how to protect their valuable retirement incomes against the eroding of their purchasing power in retirement. They should look carefully at a selection of annuity quotes and choose carefully the best annuity rates for their situation, taking into account the effects of inflation on their retirement incomes.
I am in the process of buying an RPI linked annuity with Canada Life. They quoted me on 28 May 2009 an annuity “increasing in line with the RPI. I accepted this quote in writing and transferred my money purchase fund to them by the stipulated date. Canada Life are now attempting to change the terms to read “the annuity will vary in line with RPI”. They did not bring this to my attention but fortunately I noticed the change – my IFA did not. I informed my IFA and Canada Life that I do not accept the change in the terms & conditions and I am insisting on the terms I agreed. Do not just rely on your IFA read the small print every time you receive updated documentation if if you think there are no alterations.