Government Bonds V Annuity

Lowtrawler

grumpsthegit said:

For the average person, a gilt ladder provides better value than an annuity because the average person will only live to 82/85. Purchasing an annuity rather than a gilt ladder is always a gamble on how long you will live. If you live to average life expectancy or less, a gilt ladder is the best choice. If you live up to 5 years longer than average life expectancy, the gilt ladder is still best. If you live more than 5 years longer than the average, the annuity becomes your best choice.

Thanks Lowtrawler this is useful. If I even live to the Average life expectancy I will be amazed based on family history and the fact I drink more than I should!

So maybe a bond ladder sufficient to cover my baseline level of expenses and keep the rest in equities plus a cash buffer for discretionary spending - oh decisions decisions.

Personally, I'm planning to setup a bond ladder to 85 keeping the money saved on an annuity in equities. If my health deteriorates so I can get an impaired life annuity, I may then sell the bond ladder / equities to get the annuity. I'm fortunately going to be in a position to buy an annuity at 85, if I'm still going then, regardless.

OldScientist

Lowtrawler said:

OldScientist said:

According to https://www.williamburrows.com/calculators/annuity-tables/
A single life level annuity taken at 58 currently has a payout rate of  about 6.8%
A joint life level annuity (100% beneficiary) at 58yo has a payout rate of about 6.2%

To cover a long enough period, you would need a 40 year nominal gilt (taking you to 98yo), so TR63, TG65, or TR68 might be suitable. £100 would buy you about £5, £4.60, and £5 of income per year, respectively and would return capital (£126, £184, and £142 when they matured).

Because of the return of capital this is not a like-with-like comparison, but it is clear that the annuity will deliver more income, but no legacy.

A better comparison is with a 40 year collapsing gilt ladder (e.g., see https://lategenxer.streamlit.app/Gilt_Ladder ) which currently has a payout rate of about 5.9%.

Again, the annuity, whether single life or joint, pays out more but at the cost of leaving no legacy (although the ladder would leave a diminishing legacy and none in the event of living beyond 40 years, at which point the income also falls to zero).

edit: If my understanding is correct, income from the annuity will be taxed, but so will income from the gilt/gilt ladder if it comes from the 75% taxable element.

I have looked into this quite a bit and any comparison between annuities / gilt ladders needs to be based on average life expectancy.. For a male aged 58, their average life expectancy is 82 and, for a woman, 85. Annuity pricing will be based on these values and a gilt ladder should be based on this comparison.

If the poster were to seek an RPI linked 100% joint income to age 85, he would be able to purchase a gilt ladder for roughly 10% less than the cost of an equivalent annuity. If he were to use the same money buying the gilt ladder, it would permit a ladder to be built expiring in his early 90's.

Through looking at a 40 year nominal gilt, you are effectively saying his life expectancy is 98 and so annuities are always going to be better.

For the average person, a gilt ladder provides better value than an annuity because the average person will only live to 82/85. Purchasing an annuity rather than a gilt ladder is always a gamble on how long you will live. If you live to average life expectancy or less, a gilt ladder is the best choice. If you live up to 5 years longer than average life expectancy, the gilt ladder is still best. If you live more than 5 years longer than the average, the annuity becomes your best choice.

Unless I have misunderstood your comparison (was it a lifetime or fixed term annuity?), I will have to disagree with some of what you write since the, in my view, the requirement is for an income stream for life - yes, the insurance company is able to use cohort mortalities in their calculations, but the individual is not since their life time is unknown. IMV, with the ladder you have to plan for a long life because the consequences of running out of money before death are severe (this is the same reason 30 years is often chosen as a planning horizon for retirements at 65/67 in SWR studies). In the example you use (not that it will make much difference, but I note that https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 has life expectancies of 84 and 87 for male and female at 58) the question then has to be 'will the 10% saving you've made cover your income for the years from 85 to death in the event that you live longer?'.

Where I would agree with you is that the argument for joint annuities is always going to be weaker, although the odds of one partner or the other or both making it to 100 are higher (roughly 10%) than for a single person (so a joint planning horizon should be longer than a single one).

Yes, I'd agree that an annuity is a gamble on whether you will live longer or not or conversely a ladder to life expectancy is a gamble that you will die young. Which side of that gamble to take is an interesting question.

zagfles

You can't really talk about the "best choice" in hindsight - my "best choice" over the last 35 years would have been to not bother with house insurance or travel insurance because I've made no claims. Or to have put everything in bitcoin 10 years ago. 

Joint annuities are surprisingly good value, I've just got a quote for over 4%, joint life RPI with 100% spouse benefit, both under 60 with a few minor health issues. One thing that passed me by was that with joint annuities the spouse annuity is tax free if the annuitant dies under 75.  

Lowtrawler

OldScientist said:

Lowtrawler said:

OldScientist said:

According to https://www.williamburrows.com/calculators/annuity-tables/
A single life level annuity taken at 58 currently has a payout rate of  about 6.8%
A joint life level annuity (100% beneficiary) at 58yo has a payout rate of about 6.2%

To cover a long enough period, you would need a 40 year nominal gilt (taking you to 98yo), so TR63, TG65, or TR68 might be suitable. £100 would buy you about £5, £4.60, and £5 of income per year, respectively and would return capital (£126, £184, and £142 when they matured).

Because of the return of capital this is not a like-with-like comparison, but it is clear that the annuity will deliver more income, but no legacy.

A better comparison is with a 40 year collapsing gilt ladder (e.g., see https://lategenxer.streamlit.app/Gilt_Ladder ) which currently has a payout rate of about 5.9%.

Again, the annuity, whether single life or joint, pays out more but at the cost of leaving no legacy (although the ladder would leave a diminishing legacy and none in the event of living beyond 40 years, at which point the income also falls to zero).

edit: If my understanding is correct, income from the annuity will be taxed, but so will income from the gilt/gilt ladder if it comes from the 75% taxable element.

I have looked into this quite a bit and any comparison between annuities / gilt ladders needs to be based on average life expectancy.. For a male aged 58, their average life expectancy is 82 and, for a woman, 85. Annuity pricing will be based on these values and a gilt ladder should be based on this comparison.

If the poster were to seek an RPI linked 100% joint income to age 85, he would be able to purchase a gilt ladder for roughly 10% less than the cost of an equivalent annuity. If he were to use the same money buying the gilt ladder, it would permit a ladder to be built expiring in his early 90's.

Through looking at a 40 year nominal gilt, you are effectively saying his life expectancy is 98 and so annuities are always going to be better.

For the average person, a gilt ladder provides better value than an annuity because the average person will only live to 82/85. Purchasing an annuity rather than a gilt ladder is always a gamble on how long you will live. If you live to average life expectancy or less, a gilt ladder is the best choice. If you live up to 5 years longer than average life expectancy, the gilt ladder is still best. If you live more than 5 years longer than the average, the annuity becomes your best choice.

Unless I have misunderstood your comparison (was it a lifetime or fixed term annuity?), I will have to disagree with some of what you write since the, in my view, the requirement is for an income stream for life - yes, the insurance company is able to use cohort mortalities in their calculations, but the individual is not since their life time is unknown. IMV, with the ladder you have to plan for a long life because the consequences of running out of money before death are severe (this is the same reason 30 years is often chosen as a planning horizon for retirements at 65/67 in SWR studies). In the example you use (not that it will make much difference, but I note that https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 has life expectancies of 84 and 87 for male and female at 58) the question then has to be 'will the 10% saving you've made cover your income for the years from 85 to death in the event that you live longer?'.

Where I would agree with you is that the argument for joint annuities is always going to be weaker, although the odds of one partner or the other or both making it to 100 are higher (roughly 10%) than for a single person (so a joint planning horizon should be longer than a single one).

Yes, I'd agree that an annuity is a gamble on whether you will live longer or not or conversely a ladder to life expectancy is a gamble that you will die young. Which side of that gamble to take is an interesting question.

I think your life expectancy is slightly out of date. I have used the latest government tables (selected for age 58 per the poster) published in March this year:

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/datasets/nationallifetablesunitedkingdomreferencetables

I think the point you are making is paying 10% extra for longevity insurance is a price worth paying.

For anyone who would be put in dire straits without the income from the gilt ladder, I agree with you. However, I am planning to have sufficient savings to either renew the gilt ladder at 85 or buy an annuity at that time. If I do, I will have lost money compared to simply buying the annuity at the outset. This is the gamble I am willing to take. I would imagine, for most people, the simplicity of the annuity and the assurance it is there for life will lead them towards an annuity.

OldScientist

Lowtrawler said:

OldScientist said:

Lowtrawler said:

OldScientist said:

According to https://www.williamburrows.com/calculators/annuity-tables/
A single life level annuity taken at 58 currently has a payout rate of  about 6.8%
A joint life level annuity (100% beneficiary) at 58yo has a payout rate of about 6.2%

To cover a long enough period, you would need a 40 year nominal gilt (taking you to 98yo), so TR63, TG65, or TR68 might be suitable. £100 would buy you about £5, £4.60, and £5 of income per year, respectively and would return capital (£126, £184, and £142 when they matured).

Because of the return of capital this is not a like-with-like comparison, but it is clear that the annuity will deliver more income, but no legacy.

A better comparison is with a 40 year collapsing gilt ladder (e.g., see https://lategenxer.streamlit.app/Gilt_Ladder ) which currently has a payout rate of about 5.9%.

Again, the annuity, whether single life or joint, pays out more but at the cost of leaving no legacy (although the ladder would leave a diminishing legacy and none in the event of living beyond 40 years, at which point the income also falls to zero).

edit: If my understanding is correct, income from the annuity will be taxed, but so will income from the gilt/gilt ladder if it comes from the 75% taxable element.

I have looked into this quite a bit and any comparison between annuities / gilt ladders needs to be based on average life expectancy.. For a male aged 58, their average life expectancy is 82 and, for a woman, 85. Annuity pricing will be based on these values and a gilt ladder should be based on this comparison.

If the poster were to seek an RPI linked 100% joint income to age 85, he would be able to purchase a gilt ladder for roughly 10% less than the cost of an equivalent annuity. If he were to use the same money buying the gilt ladder, it would permit a ladder to be built expiring in his early 90's.

Through looking at a 40 year nominal gilt, you are effectively saying his life expectancy is 98 and so annuities are always going to be better.

For the average person, a gilt ladder provides better value than an annuity because the average person will only live to 82/85. Purchasing an annuity rather than a gilt ladder is always a gamble on how long you will live. If you live to average life expectancy or less, a gilt ladder is the best choice. If you live up to 5 years longer than average life expectancy, the gilt ladder is still best. If you live more than 5 years longer than the average, the annuity becomes your best choice.

Unless I have misunderstood your comparison (was it a lifetime or fixed term annuity?), I will have to disagree with some of what you write since the, in my view, the requirement is for an income stream for life - yes, the insurance company is able to use cohort mortalities in their calculations, but the individual is not since their life time is unknown. IMV, with the ladder you have to plan for a long life because the consequences of running out of money before death are severe (this is the same reason 30 years is often chosen as a planning horizon for retirements at 65/67 in SWR studies). In the example you use (not that it will make much difference, but I note that https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 has life expectancies of 84 and 87 for male and female at 58) the question then has to be 'will the 10% saving you've made cover your income for the years from 85 to death in the event that you live longer?'.

Where I would agree with you is that the argument for joint annuities is always going to be weaker, although the odds of one partner or the other or both making it to 100 are higher (roughly 10%) than for a single person (so a joint planning horizon should be longer than a single one).

Yes, I'd agree that an annuity is a gamble on whether you will live longer or not or conversely a ladder to life expectancy is a gamble that you will die young. Which side of that gamble to take is an interesting question.

I think your life expectancy is slightly out of date. I have used the latest government tables (selected for age 58 per the poster) published in March this year:

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/datasets/nationallifetablesunitedkingdomreferencetables

I think the point you are making is paying 10% extra for longevity insurance is a price worth paying.

For anyone who would be put in dire straits without the income from the gilt ladder, I agree with you. However, I am planning to have sufficient savings to either renew the gilt ladder at 85 or buy an annuity at that time. If I do, I will have lost money compared to simply buying the annuity at the outset. This is the gamble I am willing to take. I would imagine, for most people, the simplicity of the annuity and the assurance it is there for life will lead them towards an annuity.

Just to note that they are period life tables in your link, whereas the one at the calculator (which was updated earlier this year) are cohort tables - where life expectancies are rising (which they still are in the UK, just not as fast as predicted a few years ago), cohort life expectancies will be greater than period (see the example at https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/pastandprojecteddatafromtheperiodandcohortlifetables/2022baseduk1981to2072 ).

I'd agree that renewing the gilt ladder is a viable strategy although it does introduce investment risk (i.e., what happens to the rest of your portfolio in the meantime) and yield risk (i.e., what if real yields are lower than they are now).

I'd also agree that the annuity is simple - the money just turns up on a periodic basis with no effort. While most of the effort and complexity in the gilt ladder occurs when setting it up, cashflows are lumpy and need some understanding and management (e.g., see the cashflow page at https://lategenxer.streamlit.app/Gilt_Ladder ).

SVaz

The main problem, as I see it, with annuities, is that the money is then unavailable should you need care in later life, whether at home or in a care home.   A small income from one could well put you beyond the limit for any help too, even if it’s not big enough to make a real difference to your life. 

My second Sipp will be left untouched, save for the tax free cash,  to make our lives easier in our elderly years,  the income from an annuity wouldn’t pay for more than a couple of months care/ help a year.    

The people who populate this board tend to be well off with no knowledge of the benefits system,  I know from my SiL how cruel it can be, an extra fiver a week from an annuity can lose you £100+  a week in benefits due to their cliff edge nature. 

At least with a large sum,  you can make your life easier until it runs out or you are hopefully dead. 

grumpsthegit

So I am still seriously considering a gilt ladder to give me peace of mind plus flexibility, so wondering if I should cash out now whilst the market is at a high and yields are just over 5%. But I wonder what might happen if the autumn statement sends the cost of government borrowing up like Truss did a while back. Would that be good ie would the face value of gilts reduce pushing up the yields? Thanks

DRS1

I think you'd be looking at long gilts for yields over 5% - maturing in 2038 or later.  Is that what you want for your gilt ladder?

MK62

grumpsthegit said:

So I am still seriously considering a gilt ladder to give me peace of mind plus flexibility, so wondering if I should cash out now whilst the market is at a high and yields are just over 5%. But I wonder what might happen if the autumn statement sends the cost of government borrowing up like Truss did a while back. Would that be good ie would the face value of gilts reduce pushing up the yields? Thanks

As nobody yet knows what will be in the upcoming budget, nor how the markets will react, there is no way to answer that with anything other than guesswork. 
If you are currently invested in equities, the value of those could easily fall more than the price of the gilts you are considering......or not.......but this is always going to be the case, and if the decision has been made to switch to a gilt ladder,  then you have to take the plunge at some point.

Lowtrawler

grumpsthegit said:

So I am still seriously considering a gilt ladder to give me peace of mind plus flexibility, so wondering if I should cash out now whilst the market is at a high and yields are just over 5%. But I wonder what might happen if the autumn statement sends the cost of government borrowing up like Truss did a while back. Would that be good ie would the face value of gilts reduce pushing up the yields? Thanks

Whether you go for an annuity or a ladder, trying to time the markets is futile. What is important is whether you can purchase the income stream you require. If you can do so today, you can take the leap and then stop having to worry about market movements. That's essentially the whole purpose of choosing a gilt ladder or annuity over drawdown.

My Index-Linked ladder is now fully setup to commence from my expected retirement date. It gives me peace of mind to know that element of my portfolio is no longer subject to market risk. I am currently building a conventional ladder to extract the PCLS and make additional tax efficient withdrawals until my full pensions are payable. I have already got post-ladder (85) funds invested in a market tracker fund. As these will not be required for over 20 years, I won't be trying to manage them for the next 15 years and will ignore market movements.