UK Gilts (eg TR32) vs Bond Funds for Retirement Portfolio Balance (7-Year Horizon, Retiring at 57)

QrizB

Peter_F said:

 30 year gilts have recently been offering yields of 5.6%. Given that a 60 year old could secure a level annuity of 6% pa ...

Just over 7%, per the current table at https://www.hl.co.uk/retirement/annuities/best-buy-rates

Or almost 4.6% increasing by RPI.

MK62

QrizB said:

Peter_F said:

 30 year gilts have recently been offering yields of 5.6%. Given that a 60 year old could secure a level annuity of 6% pa ...

Just over 7%, per the current table at https://www.hl.co.uk/retirement/annuities/best-buy-rates

Or almost 4.6% increasing by RPI.

Hardly apples to apples though......

OldScientist

JamTomorrow said:

OldScientist said:

Yes, your understanding is correct. If the duration of the annuity and the fixed income holdings are perfectly matched then the rise in price of the gilt should exactly compensate for the fall in payout rate of the annuity. In practice, matching the duration exactly is unlikely to be achieved, but the tracking error (in terms of income purchased) will be smaller than with no matching (so it is a matter of reducing interest rate risk rather than eliminating it).

While it does seem like alchemy, what this method tries to do is to hold a collection of fixed income that has similar properties to that held by the insurance company (their actual underlying holdings are unknown and will vary from company to company). In order to achieve a better match it is usual to hold two or three gilts at a range of maturities (rather than just one) since these will then capture changes across the yield curve (e.g., as we have seen recently, yields of longer gilts have risen far more than those of shorter gilts).

It is unfortunate that deferred income annuities are not currently available in the UK (they are available in the US where they are sometimes used as longevity insurance) since this would remove the need to mess about with matching!

Thanks again, your insight is brilliant and feels like an "aha" moment! It reminds me of when I realised that concentrating my workplace pension contributions into fewer months, rather than spreading them evenly over 12 months, significantly reduced my National Insurance (NI) contributions for the same pension outcome.  Something that is straightforward to do but never seems to make mainstream financial guidance.

It also resonates with a past strategy where I used a Contract for Difference (CFD) to hedge a 3-year Save As You Earn (SAYE) scheme. I was confident the share price had more downside risk by the time my SAYE matured in a year, so the CFD effectively locked in the current price for a small cost.

Similarly, I’m surprised no financial institutions are offering a product to lock in today’s record-high annuity rates for a modest fee, especially for those nearing retirement. After reading your post, I’m keen to explore this approach further and allocate part of my pension portfolio to UK Gilts that align with my investment horizon.  Sorry, but a few questions:

1. Is a single Gilt too simplistic or directionally fit for purpose? I assume your suggestion to use 2–3 funds is to hedge against changes in the yield curve, which could make a single Gilt less effective. Is that the risk?
2. Resources for further research? Are there any recommended books, articles, or websites where I can dive deeper into using Gilts to lock in annuity rates?  
3. Tools for Gilt selection? Are there any existing tools that take inputs like age, years to retirement, and desired annuity investment (e.g., £300k) to recommend specific UK Gilts? If not, I’ll consider building something like this using Google’s Gemini Canvas or similar platforms?

1)Yes, a single gilt (or fund) will not track changes across the yield curve, multiple ones (two or three) will do a better job.
2) There are quite a lot of threads on duration matching and liability matching at bogleheads (e.g., see bobcat2's posts in https://www.bogleheads.org/forum/viewtopic.php?t=445348 ) which is a similar effect
3) AFAIK, no.

This idea is not new, lifestyle retirement plans that were going to purchase a nominal annuity would include a mix long (over 15 year) gilt funds and 'cash' (STMMFs) to achieve something similar.