Letter sent out to policy holders investing in RPI linked products.
Canada Life Retail Price Index (RPI) linked annuities remain stable despite sub-zero inflation
When you took out your annuity you chose to have your payments linked to the Retail Prices Index (RPI). In March 2009, RPI went negative for the first time since 1960, to -0.4%, down from zero in February 2009.
We will be writing to you prior to your policy anniversary date to tell you about how this will affect your annuity payments. In the meantime please find below some information on RPI.
The Retail Prices Index (RPI) has gone down – how will this affect my annuity?
The payments you receive from your Canada Life annuity are linked to RPI. Since 1960, RPI has been increasing every year meaning that an annuity linked to RPI would also increase. However, in March 2009, RPI was lower than in March 2008. Although your payments should decrease in line with this fall in RPI, we have decided not to let them go down.
Why have you decided not to let my annuity payments go down?
RPI gives an indication of the cost of living by monitoring prices on many goods and services frequently used by households in the UK.
The biggest downward impact on RPI in March 2009 came from lower mortgage costs, following the Bank of England's repeated interest rate cuts.
However, the costs of other measures such as food, fuel and light and household goods have actually increased. We recognise the cost of living for our clients may not have fallen as quickly as RPI and so we have decided not to let RPI linked annuities go down.
How will you do this?
We will work out what we would be paying you if we allowed your annuity payments to decrease in line with RPI, and then pay the difference between that and your current level ourselves. This means that your income will stay level until the rate of RPI increases it (calculated on your policy anniversary date) to above its current level.
The following table shows how this may work. This is for information only and does not relate to actual RPI or income figures:
Year |
What would be paid for an RPI linked annuity |
Difference made up by Canada Life |
Actual amount paid |
Actual payment % change |
RPI % change |
2006 |
£1,000 |
£0 |
£1,000 |
- |
- |
2007 |
£1,050 |
£0 |
£1,050 |
5.0% |
5.0% |
2008 |
£1,100 |
£0 |
£1,100 |
4.8% |
4.8% |
2009 |
£1,070 |
£30 |
£1,100 |
0.0% |
-2.7% |
2010 |
£1,080 |
£20 |
£1,100 |
0.0% |
0.9% |
2011 |
£1,110 |
£0 |
£1,110 |
0.9% |
2.8% |
In the example, annuity payments in 2007 and 2008 are increasing in line with RPI. However, in 2009 and 2010, RPI is below the 2008 figure and an income linked to RPI would go down. To maintain your income we pay the difference of £30 in 2009 and £20 in 2010.
What happens when RPI starts to increase again?
Initially we expect future increases in RPI to reduce the amount of “difference” we have to make up. In the example above the RPI increase of 0.9% in 2010 has reduced the amount of the “difference” we have to make up rather than increasing your payment. When the level of RPI increases what you would be being paid over the actual amount being paid, your annuity payments will start to increase again.
What does this mean for my future payments?
We have no current plans to allow your payments to fall as RPI goes down, but we will keep the situation under review as circumstances change. Although we are not allowing your payments to go down in 2009, this does not mean that we will never allow your payments to fall in future years.
If you have any questions, please phone us on 0845 6060708, Monday to Friday between 9.00am and 5.00pm.
Page last updated May, 2009 ID3042
