Fixed Term Annuity v Gilt Ladder

Notfarfromtheborder

Happy Sunday

Using money helper website £225K buys 10 years fixed term income at £28K. Using gilt ladder £28K per year costs £226K. Am I right in thinking annuity carries no risk (apart from inflation), gilts have some risk but benefit from more favorable tax treatment? 

Also, appreciate a fixed term annuity would trigger MPAA, could I set one up and take tfls now with any further income deferred to April 27?

Thanks

leosayer

I assume the £225k/£226k is within a SIPP and that you're talking about a nominal gilt ladder, not index-linked.

If so, then the tax situation is almost identical:

• With an annuity you will take 25% tax free lump sum at the start then the income is taxed at your marginal rate
• With a gilt ladder, the proceeds (interest and maturity values) are paid back into your SIPP.  From there you can extract it using FAD or UFPLS. You can take the 25% tax free lump sum at the start or only when you take income, it's up to you. As with an annuity, the income is taxed at your marginal rate. Taking flexible income in this way triggers MPAA.

Also, there's little difference in risk:

• With annuities, the FSCS protects you if the insurance company goes bust
• With gilts, they are backed by the UK government

The main benefit of gilts over annuities is that you can change your mind and sell (at an an unknown price) before maturity. Both leave you at risk of high inflation.

In answer to your last question, I'm not sure it's possible to buy an annuity now to start so far in the future. However if you buy a gilt fund with an appropriate average duration, the price should move in a way that protects you from falls in annuity rates.

Notfarfromtheborder

Thanks, yes funds in workplace pension at present so would need to transfer and yes, nominal not IL.

 Annuity seems a much simpler option to me?

SVaz

Canada life do them,  I don’t know if they sell them direct to consumer because when I looked into it,  there was no benefit to me getting one over a Gilt ladder or even keeping the cash in a money market fund.  I specified April 2028 as a start point and £10k a year x 5. 

If interest rates plummet then I would have been better off with one vs a money market fund.  Time will tell. 

You can’t specify different amounts either, e.g. I wanted £11k x 2 years then £9k x 2 years followed by £6k for the final year as that’s when my SP kicks in.  

Further out, I’ve gone for a small gilt ladder for 4 years starting in 2034,  paying 4.2% average on the coupons.   I haven’t looked at a comparable fixed term annuity. 

Marcon

Notfarfromtheborder said:

Happy Sunday

Using money helper website £225K buys 10 years fixed term income at £28K. Using gilt ladder £28K per year costs £226K. Am I right in thinking annuity carries no risk (apart from inflation), gilts have some risk but benefit from more favorable tax treatment? 

Also, appreciate a fixed term annuity would trigger MPAA, could I set one up and take tfls now with any further income deferred to April 27?

Thanks

You can't take a tfls from an annuity. You'd take tax free cash and then buy an annuity with the remaining funds 

FIREDreamer

SVaz said:

You can’t specify different amounts either, e.g. I wanted £11k x 2 years then £9k x 2 years followed by £6k for the final year as that’s when my SP kicks in.  

You can get those payments by buying three annuities …

A £6k annuity for 5 years
plus
A £3k annuity for 4 years
plus
A £2k annuity for 2 years

MallyGirl

Notfarfromtheborder said:

Thanks, yes funds in workplace pension at present so would need to transfer and yes, nominal not IL.

 Annuity seems a much simpler option to me?

Annuity is likely simpler. To me the biggest difference is that if you die during the annuity term it is likely gone but with gilts they are there for your beneficiaries 

ali_bear

You can also be flexible with the gilt ladder, for example cash it in early. 

Alexland

MallyGirl said:

 Annuity seems a much simpler option to me?

Annuity is likely simpler. To me the biggest difference is that if you die during the annuity term it is likely gone but with gilts they are there for your beneficiaries 

Yes but a lifetime annuity covers the shortfall risk and can guarantee a good quality of life regardless of longevity.

I'm attracted to a middle path of building a gilt ladder that goes beyond average life expectancy to say say 95 (to lock in the YTM) then maybe trading it in in at age 70/75 for an annuity. That way if you die in early retirement from 55/57 then a huge amount of money wasn't wasted  And if you develop health problems then it might only need a small proportion of the remaining funds to buy the annuity. And if you live healthily to a very long age then there wasn't going to be any/much leftovers for the beneficiaries anyway.

ali_bear

Are you talking about buying the gilt ladder within a pension wrapper? 

Notfarfromtheborder

MallyGirl said:

Notfarfromtheborder said:

Thanks, yes funds in workplace pension at present so would need to transfer and yes, nominal not IL.

 Annuity seems a much simpler option to me?

Annuity is likely simpler. To me the biggest difference is that if you die during the annuity term it is likely gone but with gilts they are there for your beneficiaries 

I believe fixed term annuity pays for the term and would not be stopped on death