Can a gilt ladder inside a SIPP beat an annuity for balanced value?

RogerPensionGuy

I'm on the verge of buying a single life annuity RPI & 100% Value Protection, I'm a little bit over age 60 and the initial rate being offered is 4.90% and I love the idea of having hardwired money RPI linked till death. I'm little concerned with inheritance, the VP is just a bit of sensible housekeeping as it didn't water down the initial rate too much, so 100% I feel is a balanced decision and if I developed a chronic medical condition in the early zone, that VP maybe make me feel less gutted and more upset emotions. 

I was all ready to buy an annuity these next few days and I read another great post by dunstonh about buying an annuity inside a SIPP and thus allowing the annuity to do what annuities do without any stress, providing hardwired income and then allows the SIPP to be drained at will, essentially defer start date of drawing, obviously the tap can be adjusted over time and allows super finesse in cash flows and obviously marginal tax being paid over time, a very flexible situation, the word utopian comes to mind, thanks again dunstonh. 

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I them got thinking & confused about the idea of doing a gilt ladder inside the SIPP providing hardwired income just like the annuity, but different possibilities. 

I played and played on gilt ladder tools getting more confused. 

I used 35 years and using just that initial 4.9% £ rate of the annuity and I can only see any gilt ladder will produce less income generally in my head, however if I died at say 15 years from now, the gilt ladder SIPP would indeed have much more value to others/inheritance. 

Can anyone please confirm my findings that an annuity at initial 4.9% RPI will beat any gilt ladder for hardwired cash over 35 years to me, but the gilt ladder wins if I die before a 20ish years period. 

Any views comments most welcome to a more confused than ever Roger. 

TIA Roger. 

SVaz

I suppose it depends on who is inheriting the Gilt ladder Sipp and if they can actually keep those investments ( or even want to) once inherited? 
If they cant or wont keep the Gilt ladder then they would have to sell before maturity and that changes things. 

It also depends on whether you have a house / significant other assets that you could call upon should you need care in later life.

My plan, should I be the last to die, was to use the house before the Sipp for any care needs but that’s gone out the window with the IHT changes to pension inheritance.  Now me or my Wife would use the Sipps first and being tied into a previous annuity would hobble that.
I’m building a small Gilt ladder for 10 years from 2034, age 70-80 that will give £3k a year,
The rest of my Sipp will be left fully invested.  

You dont’ have to be either / or.
You can do both - Gilt ladder and Annuity. 

MK62

An RPI annuity at 60 with 100% value protection paying 4.9% seems relatively high - is it enhanced in some way? (and out of interest, can you tell us who is offering that?)
That said, you would appear to be correct in that a 35 year index linked gilt ladder's payout will currently be considerably less than 4.9%, probably a full 1% less, at c3.9%. So if you are happy that your figures are correct, and definitely don't need joint life cover, then the annuity would seem something of a no brainer......

RogerPensionGuy

MK62 said:

An RPI annuity at 60 with 100% value protection paying 4.9% seems relatively high - is it enhanced in some way? (and out of interest, can you tell us who is offering that?)
That said, you would appear to be correct in that a 35 year index linked gilt ladder's payout will currently be considerably less than 4.9%, probably a full 1% less, at c3.9%. So if you are happy that your figures are correct, and definitely don't need joint life cover, then the annuity would seem something of a no brainer......

Thanks for reply. 

Age is closer to 62/63 and nil enhancements thankfully. 

In all my research Scottish Windows mostly(98%) pays best % output, JUST is normally just behind Scottish Widows.

gm0

I think there is a danger of getting lost in the airthmetic weeds to find a "better" answer which is scenario and path dependent (and involves heirs).   My take is slightly different.  There is a cloud of risk hanging over all of us. Outside of investment returns (Drawdown alternative), major crisis for life companies,  inflation surprise in general, or versus RPI/CPI definition.  

I am considering annuitising a portion. Not all. Of my own pot.

After the returns/inflation risks which differ across pension access choices.  Future change regulatory risk cuts in CGT reform, IHT reform. Taxing "pots".  Some form of LTA rides again TFLS reform.  Retrospective vs not retrospective.

It seems plausible to me that (to my view - entirely unfairly - on horizontal fairness criteira - same benefits value - different wrappers).  DC pots could be targeted for a cheap tax fiddle.  And DB as usual (LTA valuation multiplier ibid left alone as politically or operationally too hard.

But it's harder for the treasury trolls to tax capital you don't have.  An annuitant in payment is closer to DB and thus perhaps escapes that version of a rake and its valuation criteria.  A pensioner with a self annuity in a SIPP still has control of the capital.  And will likely be hit.  Or not.  Impossible to know how subtle future regulation and how the exceptional treatment of gilts would play in.  

Or "pension income" gets capitalised for wealth taxes in some format. (Prior LTA age 75 tests ibid).  Impossible to know

So in general I tend to the view that regulatory risk hedging. Some of this. Some of that.  Pensions, ISA is a way to frustrate the thieving sobs.   Whereas all eggs in a basket leaves you open to risks on that single basket.  

So inflation sustained above RPI measure for annuity (1970s redux) or worse affecting a fixed or less indexed annuity. Or a gilt ladder (self). In period where inflation hedging did better on other investments - so advantage drawdown (albeit after a rocky ride - very path dependent).  

Or a DC pot specific tax targeted a ridiculously unfair plan which scrapes money off the DC pot owners who haven't bought annuities.  To pay the indexation on public sector DB pensions (or any other PS liability du choix - not hypothecated pick example for worthiness or additional outrage).  The point being the same value of pension cashflow - should be taxed the same - regardless of source, tax wrapper and original employment. And this principle should be violated extremely sparingly.  Government however cannot be trusted not to take expedient hack shortcuts.

You draw your own conclusions and take the risk mix you choose

Lowtrawler

RogerPensionGuy said:

MK62 said:

An RPI annuity at 60 with 100% value protection paying 4.9% seems relatively high - is it enhanced in some way? (and out of interest, can you tell us who is offering that?)
That said, you would appear to be correct in that a 35 year index linked gilt ladder's payout will currently be considerably less than 4.9%, probably a full 1% less, at c3.9%. So if you are happy that your figures are correct, and definitely don't need joint life cover, then the annuity would seem something of a no brainer......

Thanks for reply. 

Age is closer to 62/63 and nil enhancements thankfully. 

In all my research Scottish Windows mostly(98%) pays best % output, JUST is normally just behind Scottish Widows.

An index linked gilt ladder over 25 years pays just over 4.9%.

At age 62/63, you have an average life expectancy of around 25 years and so both the gilt ladder and the annuity can be expected to balance on the numbers you have provided. Given the longevity insurance you get from an annuity, the annuity is the clear winner.

Checking the moneyhelper annuity quote, 62 years old, nil enhancement, RPI annuities with 100% value protection, in my postcode, they pay out around 4.6%. At that rate, the gilt ladder would provide the same return over 28 years and so provide about 10% more than the annuity. Most people would continue to favour the annuity due to the longevity insurance.

Personally, I'm going down the RPI gilt ladder route because it will cover both my wife and myself where the moneyhelper annuity quote provides only a 4.3% return meaning the gilt ladder is 5 years more beneficial than our average life expectancy. It works for me because I have sufficient savings to cover the longevity risk. Again, for most people, they would favour the annuity.

SVaz

That’s why I think a mix of things is best.
We are fortunate that my Wife can get out all her Sipp tax free in the next 4 years into cash and S+S ISAs.  That’s at least £1k in tax saved per year. 
My 2 Sipps - one will hold 25% STMMF in readiness  to take the TFLS in 2 years,  25% in a 5 yr Gilt ladder starting in 2034,  which I’m in the process of arranging and the rest in a Global index tracker.
The other holds 5 years income in STMMF to take me to 2032 ( SP age) and the rest in a Global index tracker.
I’ll decide what to do closer to age 70 regarding an annuity.   2x SP + my Military pension and the contents of the ISAs means we don’t really need any Sipp income so the Gilt ladder proceeds will likely be gifted to our Grandson, who will be leaving school in 10 years. 

RogerPensionGuy

Great replies on my questions, thanks everyone for posting. 

Lots of views comments looking at various angles and seeing if a different pathway or using a few pathways makes me feel comfortable.

I think whatever I do, I can(if alive) look back with 20/20 hindsight down the road and be critical of my choices, but I've always adopted the view in my life that if I do sufficient research, get views of others, don't rush and try picking options choices that feel balanced in my head, I'm happy, if in the fulness of time my picks were a bit negative, I just accept it and if it pans out better than balanced, I just accept it.

What I don't like doing is making rash, ill~informed or un~informed decisions and feeling uncomfortable down the road.

After my much reading on here and all threads here, I feel very informed and comfortable moving forwards with my next housekeeping decisions trying to lock in hard cash flows until my expiry. 

I normally like keeping options open for flexibility, changes & augmentation and that's probably why I'm a little nervous of locking in to an annuity in my little head. 

I'll be chewing over all my informations & data these next few days and see how I feel, then I'll proceed as I see fit. 

Again, thanks for such fantastic posts on here. 

Cheers Roger. 

grumpsthegit

I have purchased a Gilt Ladder inside my SIPP - have achieved a 5.16% yield. The advantages as I see it are:

If I decide I am bored and early retirement is not for me or even if I get a part time job I can reduce the Drawdown and keep the funds in the SIPP - will put into any excess into equities probably.

If I get ill health and see a shortening of my lifespan I can draw more by selling the bonds - yes there is a risk I may not realise the Yield I Originally hoped to get but at least I have that option.

You can stagger the income from a Bond ladder- so for example I have one that pays me more up until I am 57 and then drops down, so that way I can keep the income just out of the higher tax bands.

Just some things to consider :-)