Which fund to lock in annuity value

dawsonrm

My wife has a DC pot of about £200k that we eventually want to use to buy a ten year inflation linked fixed term annuity at 58 as a bridge to SP at 68 and she is currently 48.

If we wanted to effectively lock in the current annuity value of that £200k I'm interested to now what kind of bond fund should she be investing in? I don't fully understand bond funds but I believe funds with the correct duration length should be able to track closely to annuity prices but I've no idea which ones!!

ukdw

See @OldScientist posts in this thread.
https://forums.moneysavingexpert.com/discussion/comment/81641486#Comment_81641486?utm_source=community-search&utm_medium=organic-search&utm_term=buy+annuity+in+10+years+time

personally though what I am doing for a future annuity purchase is holding half the amount in a money market fund to protect some of the current value, plus leaving the rest invested to hopefully take advantage of growth in the meantime.

My horizon though is months, rather than years like yours.

dawsonrm

ukdw said:

See @OldScientist posts in this thread.
https://forums.moneysavingexpert.com/discussion/comment/81641486#Comment_81641486?utm_source=community-search&utm_medium=organic-search&utm_term=buy+annuity+in+10+years+time

personally though what I am doing for a future annuity purchase is holding half the amount in a money market fund to protect some of the current value, plus leaving the rest invested to hopefully take advantage of growth in the meantime.

My horizon though is months, rather than years like yours.

Thanks for that an interesting thread.

If I've understood it correctly the closest I can get to locking in the current annuity rate would be to put it in an index linked gilt fund with 20 year duration (10 years till 58 + 10 year fixed term). 

Alexland

I don't expect you will find a fund that does this for you and buying the IL gilts directly will save you the ongoing fund management costs. I'd suggest spreading the money across a few holdings with different maturities across the period depending on how scientific you want to be. If you are looking to spend it all during that decade then you don't want it all maturing at the end.

Of course this also fixes the return she will get in the final 10 years of accumulation.

https://www.dividenddata.co.uk/index-linked-gilts-prices-yields.py

Then when she is 58 she could either drawdown from the IL gilts or buy a fixed term annuity.

dawsonrm

Unfortunately I don't think it's possible to buy individual gilts in the scheme (L&G) and is limited to funds 

Alexland

dawsonrm said:

Unfortunately I don't think it's possible to buy individual gilts in the scheme (L&G) and is limited to funds 

Can she partially transfer out to a SIPP that allows direct investment in IL gilts?

dawsonrm

Alexland said:

dawsonrm said:

Unfortunately I don't think it's possible to buy individual gilts in the scheme (L&G) and is limited to funds 

Can she partially transfer out to a SIPP that allows direct investment in IL gilts?

That might be a possibility but I was hoping I could find a fund to at least get close to tracking annuity values without having to use individual gilts

OldScientist

A fixed-term annuity is different to a lifetime annuity in terms of its duration. Very roughly, a fixed term annuity will have a duration of half the period of the term (in other words, a 10 year term would have a duration of 5 years) plus the delay (so roughly 15 years in your case).

Three approaches are:
1) If you can buy individual gilts on the DC platform, then construct a inflation linked gilt ladder (e.g., see https://lategenxer.streamlit.app/Gilt_Ladder) a 10 year ladder to generate £12k per year starting in 10 years time would currently cost about £100k and just use the income from that.
2) Use a selected number of gilts in the right maturity range (e.g., TG36, TG39, and T44) and then convert the proceeds to an annuity in 10 years time.
3) Combine two inflation linked gilt funds with different durations. The 'all shares' version (e.g., https://global.morningstar.com/en-gb/investments/funds/F00000M0M8/portfolio ) currently has a duration of just under 14 so not too far off the initial 15 years. The ishares 0 to 10 year gilts index fund (https://global.morningstar.com/en-gb/investments/funds/F00001GHA0/portfolio ) has a duration of 5 years, so a gradually changing mix of the two would allow the duration to be tracked. The latter fund is quite new so may not be available (e.g., it is available at iweb and HL, but not at fidelity).

I note that I've done some preliminary (i.e,, unfinished) historical modelling for nominal gilts (from 1916 onwards) and lifetime annuities that indicates with a single gilt the income is locked in to about 5% most of the time, but the worst cases can exceed 15%. I've not modelled term annuities or inflation linked gilts and annuities (there's less history, i.e. from 1984 onward), but would expect similar, or possibly smaller, tracking errors.

DRS1

Of course she could stay with L&G where she may find she has an easier decision - maybe between an index linked gilt fund or a conventional gilt fund.  Not sure how good a match either would be and like someone else on here she may conclude that the performance of the gilt fund she picks is not stellar.

dawsonrm

Thanks @OldScientist that's very helpful.

I'm reluctant to give up 10 years of "possible" growth but with current equity values (the 200k is currently 100% in a global index tracker) and good annuity yields, being able to lock in the current value seems a sensible thing to do. If an AI bubble does burst no guarantee it's gonna recover before she's 58.