Fixed term Annuity v Gilt Ladder

rudebh0y

leosayer said:

You already have guaranteed income that you could take now by starting your DB early, albeit at a reduced rate. 

This would allow more time for more of your sipp savings to grow. 

Have you considered that?

I am considering all sorts but a little risk adverse so my thinking was to use the SIPP to guarantee yearly income and so have all income in retirement guaranteed.

FIREDreamer

rudebh0y said:

Rdaveshep26 said:

rudebh0y said:

I am looking at ways to use money in my SIPP to bridge a five year gap before my DB pension kicks in. I need 42k a year income to give me 3k a month income.  I have 330k in my SIPP.

I have read people suggesting gilt ladders are way to go.

Legal and General fixed term annuity ladder gives me 42k a year for 5 years and on maturity I get 170k lump sum back for the full 330k.

A 5 year gilt ladder using https://lategenxer.streamlit.app/Gilt_Ladder website show a cost of 186k for 42k a year flow. So I would have 144k left in SIPP   

So my 144k left  in my SIPP after buying gilts would have to make  over 26k over the five years to make it the best way to go.  
   
Have I got this right or am I missing something.

 Also it may be possible to get better annuity rate elsewhere just used L&G as they gave a handy online calculator .

No-one else has seen the same data as you have, but can you clarify if the residual sums (144k OR 170k) are both in 2025 money terms - or both 2030? (- or otherwise)?  That would be helpful to know,

What do you mean no one has same data?  These are results I got from the two websites.  I get 170k back from annuity in 5years or the gilt ladder would cost 186k to start up ?  I do admit this is all new to me so I could be mistaken on what results mean.

Your residual £144k now should grow to more than £170k in 5 years time. This is as expected as the temporary annuity provider expects to make some degree of profit on the deal. 

rudebh0y

michaels said:

rudebh0y said:

I am looking at ways to use money in my SIPP to bridge a five year gap before my DB pension kicks in. I need 42k a year income to give me 3k a month income.  I have 330k in my SIPP.

I have read people suggesting gilt ladders are way to go.

Legal and General fixed term annuity ladder gives me 42k a year for 5 years and on maturity I get 170k lump sum back for the full 330k.

A 5 year gilt ladder using https://lategenxer.streamlit.app/Gilt_Ladder website show a cost of 186k for 42k a year flow. So I would have 144k left in SIPP   

So my 144k left  in my SIPP after buying gilts would have to make  over 26k over the five years to make it the best way to go.  
   
Have I got this right or am I missing something.

 Also it may be possible to get better annuity rate elsewhere just used L&G as they gave a handy online calculator .

Inflation is on the up again (BOE say 3.7% but we all know what really happens once it starts rising) - why would you possibly want to run inflation risk?

The 3k monthly income is probably more than I need so my thinking was over the five years it will be ok for inflation to eat into it a little.  Though I will be looking at index linked ones also. Just trying to understand best solution

rudebh0y

MK62 said:

rudebh0y said:

I am looking at ways to use money in my SIPP to bridge a five year gap before my DB pension kicks in. I need 42k a year income to give me 3k a month income.  I have 330k in my SIPP.

I have read people suggesting gilt ladders are way to go.

Legal and General fixed term annuity ladder gives me 42k a year for 5 years and on maturity I get 170k lump sum back for the full 330k.

A 5 year gilt ladder using https://lategenxer.streamlit.app/Gilt_Ladder website show a cost of 186k for 42k a year flow. So I would have 144k left in SIPP   

So my 144k left  in my SIPP after buying gilts would have to make  over 26k over the five years to make it the best way to go.  
   
Have I got this right or am I missing something.

 Also it may be possible to get better annuity rate elsewhere just used L&G as they gave a handy online calculator .

Over 5 years that's 3.38%pa.........you could buy a 5yr gilt today (T30) and get a YTM of 4.16%.........and that's pretty much guaranteed (well as far as can be). True, having the £144k in equities or partly in equities means taking some risk......there's a decent chance of making more, but obviously no guarantees.....

The gilt ladder tool you used suggests a gilt returning £170k in 5 yrs time (T30) would cost c.£138k today......so investing the whole £144k, would return c£177k in 5 yrs time.

PS - for clarity I assumed 3% interest on the coupons........

Thats a good idea buying a 5 year gilt with the 144k.  Another option. Thank you

michaels

rudebh0y said:

michaels said:

rudebh0y said:

I am looking at ways to use money in my SIPP to bridge a five year gap before my DB pension kicks in. I need 42k a year income to give me 3k a month income.  I have 330k in my SIPP.

I have read people suggesting gilt ladders are way to go.

Legal and General fixed term annuity ladder gives me 42k a year for 5 years and on maturity I get 170k lump sum back for the full 330k.

A 5 year gilt ladder using https://lategenxer.streamlit.app/Gilt_Ladder website show a cost of 186k for 42k a year flow. So I would have 144k left in SIPP   

So my 144k left  in my SIPP after buying gilts would have to make  over 26k over the five years to make it the best way to go.  
   
Have I got this right or am I missing something.

 Also it may be possible to get better annuity rate elsewhere just used L&G as they gave a handy online calculator .

Inflation is on the up again (BOE say 3.7% but we all know what really happens once it starts rising) - why would you possibly want to run inflation risk?

The 3k monthly income is probably more than I need so my thinking was over the five years it will be ok for inflation to eat into it a little.  Though I will be looking at index linked ones also. Just trying to understand best solution

£3000 starting 5 years ago with no inflation increase would only give you buying power today of £2400, so 20% less.

incus432

rudebh0y said:

The 3k monthly income is probably more than I need so my thinking was over the five years it will be ok for inflation to eat into it a little.  Though I will be looking at index linked ones also. Just trying to understand best solution

£3000 starting 5 years ago with no inflation increase would only give you buying power today of £2400, so 20% less.

Fixed term annuities can be bought with annual RPI increases but the cost in terms of reduced initial income is high. If course if inflation does take off a flat rate annuity will lose purchasing power, but if it doesnt it's fine if you can cope with it and have headroom with other income.  That was my calculation with an 8 year FT annuity.  Longer than that I would want some inflation protection

OldScientist

rudebh0y said:

I am looking at ways to use money in my SIPP to bridge a five year gap before my DB pension kicks in. I need 42k a year income to give me 3k a month income.  I have 330k in my SIPP.

I have read people suggesting gilt ladders are way to go.

Legal and General fixed term annuity ladder gives me 42k a year for 5 years and on maturity I get 170k lump sum back for the full 330k.

A 5 year gilt ladder using https://lategenxer.streamlit.app/Gilt_Ladder website show a cost of 186k for 42k a year flow. So I would have 144k left in SIPP   

So my 144k left  in my SIPP after buying gilts would have to make  over 26k over the five years to make it the best way to go.  
   
Have I got this right or am I missing something.

 Also it may be possible to get better annuity rate elsewhere just used L&G as they gave a handy online calculator .

For nominal annuities (fixed term or lifetime), the underlying investments are largely corporate bonds (and possible a range of other investments) with higher yields than gilts. Provided the fees charged are less than the difference in yields then the annuity might win out. In other words, a gilt ladder isn't always the best solution. However, with the figures you've used, you'd need a nominal annualised total return of at least 3.5% for the gilt ladder to win, which you'd currently get for certain with a low coupon 5 year gilt such as TG30 (the price return alone is enough to give just under £177k - reinvested coupons would add to that)

With the annuity, it may be worth checking what would happen to payments and premium if you die during the 5 years.

As others have said, an inflation linked gilt ladder may be worth a look although the up front cost is higher (about £214k). Are CPI/RPI linked fixed term annuities available for comparison?

incus432

OldScientist said:

As others have said, an inflation linked gilt ladder may be worth a look although the up front cost is higher (about £214k). Are CPI/RPI linked fixed term annuities available for comparison?

Moneyhelper dont have the option to see these but Retirement Line will give you no obligation quotes for whatever options you specify and are very prompt.

A full term guarantee period -so it continues to pay out to a beneficiary in case of death - is well worth considering too. The cost seems quite low