Would this be a reasonable plan (ILG ladders, ISA/SIPP income etc)?

username12345678

Looking at the positive yields (atm) on ILG across the yield curve I have been thinking about building a ladder to take me to age 75 with a view to perhaps buying an annuity at this point.

After checking through previous years spending I am happy that £36k pa (cpi adjusted) would more than cover my spending needs.

My thoughts:

Age 55-67

ISA: £20k pa 

SIPP: £16k pa (25% tax free, plus personal allowance = no tax?)


Age 67-75

State pension: £10k pa

SIPP: £26k pa (£23k net?)



The bond ladder would cover the £16k pa and then the £26k pa. It would cost approximately 25% of the total SIPP.

Are there flaws in this plan and is there a better way of doing it?


Thanks.

Linton

I am somewhat unclear as to how your ladder will work.  To be 100% safe from inflation you will need to both inflation link the income needed for each step of the ladder and inflation link the lump sum  to buy the next one and to buy your final annuity. Can you give a simpple example over time showing the value and time to maturity of the steps of the ladder and what is happening to the rest of your SIPP?

My other thought was that putting a large % of your assets into inflation linked bonds over the long term will almost certainly return less than using equity funds.  

username12345678

The complete ladder (covering age 55-75) would be purchased over the next couple of months or so, it wouldn't be a rolling ladder. As I'm sure you're aware, there are a couple of gaps within the issues that would need perhaps doubling up on the preceding years bond.

On your point on long term expected returns of equities versus ILG's I would absolutely agree. However, I don't have the appetite for volatility that would allow me to comfortably hold levels of equities that perhaps other investors would.

25% of my SIPP to provide a guaranteed inflation-proofed income floor of expected spending feels like a reasonable compromise.

Linton

username12345678 said:

The complete ladder (covering age 55-75) would be purchased over the next couple of months or so, it wouldn't be a rolling ladder. As I'm sure you're aware, there are a couple of gaps within the issues that would need perhaps doubling up on the preceding years bond.

On your point on long term expected returns of equities versus ILG's I would absolutely agree. However, I don't have the appetite for volatility that would allow me to comfortably hold levels of equities that perhaps other investors would.

25% of my SIPP to provide a guaranteed inflation-proofed income floor of expected spending feels like a reasonable compromise.

In principle your plan seems reasonable to me if you are risk averse and you can continue to get the IL bonds at a price less than or close to par, holding until maturity.   Obviously you need to plan how you will finance your above floor and one-off expenses and post-75 annuity at then current prices, possibly taking on some risk to do so.  There could be some 2nd level of detail  matters that will need a bit of thought but I can't think of anything serious.

NoMore

Given your apparent requirement for certainty and dislike of volatility, Have you looked into an annuity instead ?

username12345678

NoMore said:

Given your apparent requirement for certainty and dislike of volatility, Have you looked into an annuity instead ?

Certainly as I got older (75+) an annuity would be my first choice assuming rates hadn't made them unattractive.

And to explain my comment on volatility, it was more that I view investing as a question of taking on the minimum amount of volatility to achieve my goal, which is having enough money to live the life I would like in retirement.

'Risk' I see as running out of money because I didn't take on enough potential volatility.

OldScientist

One risk is centred on the purchase of the annuity at 75 (I assume you would purchase an RPI/CPI protected one, rather than a nominal one).

1) As you stated, the yields on ILG, and hence, the future payout rates on RPI annuities are unknown.
2) The pot you intend to use to purchase it may not keep up with inflation. There have certainty been 20 year periods in the UK where equities have produced a real total return below zero (whether this will happen to global equities is a different question). If this was to occur,  you would be able to buy less real income. If oyu have nominal bonds in your portfolio, they also have failed to keep up with inflation at times.
3) There is no guarantee that RPI annuities will remain available (e.g., they are no longer available in the US) either because the insurance companies can't make enough money on them or because the ILG that underpin them will no longer be issued (e.g. Canada has stopped issuing inflation linked bonds - not sure whether this is a temporary or permanent move).

An alternative would be to purchase annuity flooring now (I note that single life at 55yo has a payout rate of about 3.3%) either enough (if you have enough to do so) or then adding to it in stages.

Linton

I think now is far too early to be making decisions constraining what happens after age 75.  By then circumstances could be very different.  For example ill health may give rise to a need for higher expenditure than simply given by inflation matching.  This could be partially or fully covered by an enhanced annuity taken out at the time.

So I suggest using the security of the guaranteed income over the next 20 years to justify a higher equity investment than would otherwise be the case perhaps until age 70.

username12345678

Linton said:

I think now is far too early to be making decisions constraining what happens after age 75.  By then circumstances could be very different.  For example ill health may give rise to a need for higher expenditure than simply given by inflation matching.  This could be partially or fully covered by an enhanced annuity taken out at the time.

So I suggest using the security of the guaranteed income over the next 20 years to justify a higher equity investment than would otherwise be the case perhaps until age 70.

Thanks for the thoughts Linton.

username12345678

OldScientist said:

One risk is centred on the purchase of the annuity at 75 (I assume you would purchase an RPI/CPI protected one, rather than a nominal one).

1) As you stated, the yields on ILG, and hence, the future payout rates on RPI annuities are unknown.
2) The pot you intend to use to purchase it may not keep up with inflation. There have certainty been 20 year periods in the UK where equities have produced a real total return below zero (whether this will happen to global equities is a different question). If this was to occur,  you would be able to buy less real income. If oyu have nominal bonds in your portfolio, they also have failed to keep up with inflation at times.
3) There is no guarantee that RPI annuities will remain available (e.g., they are no longer available in the US) either because the insurance companies can't make enough money on them or because the ILG that underpin them will no longer be issued (e.g. Canada has stopped issuing inflation linked bonds - not sure whether this is a temporary or permanent move).

An alternative would be to purchase annuity flooring now (I note that single life at 55yo has a payout rate of about 3.3%) either enough (if you have enough to do so) or then adding to it in stages.

The possibility of getting to 75 and finding that annuity rates are poor value (again) would be disappointing but not the end of the world.

I would have hoped that the remaining non-ILG investments (75% of SIPP) would give me other options given my only withdrawals would have been the personal allowance and the 25% tax free cash (£16k pa at the moment).

I accept that there are no perfect solutions when nobody knows the future, for me I’ll be happy if I can fund the (modest!) life I would like in retirement whilst hitting as few potholes as possible.

I’d be 90% equities if I could take the rollercoaster ride!