Gilt Ladder In Pension Fund

MK62

MetaPhysical said:

So, back to first principles then......  if all the gilt is doing "preserving" value and not creating wealth, what is the point in them?  

You've answered your own question there......

af1963

MetaPhysical said:

One of the things I have noted, certainly on Interactive Investor which is my platform, is that you can only acquire IL gilts via the telephone - you can't do it online.

Yes, they haven't automated the complications of handling the clean/dirty pricing.  But when I did this, they charged me the lower online dealing price rather than the phone dealing price, because it wasn't possible for me to deal online. 

They also don't correctly display the value after buying IL gilts - they show a total that is wrongly based on clean price, which makes it look like a big immediate loss . It doesn't affect the real value of the holding, but it's a bit of a pain for tracking the current total.

m_c_s

One important point than always seems to be forgotten is that the uprating of IL gilts will change from Feb 2030.
The inflation uprating of UK IL gilts will no longer be RPI so you need to factor in a lower level of inflation protection; that being CPIH. 
When I last looked the CPIH measure has given a lower measure of inflation than the RPI  by around 1% per year on average since 2012. CPIH has only been around for 13 years so not sure whether the longer term difference with RPI would have been even greater. 
The graph below shows the ONS data for RPI, CPIH and CPI over the last 13 yrs for comparison. There is a big difference.


This has been discussed a lot before and 1% to 2% is a material difference over the long term so worth reminding people who are planning their retirement cash flows using UK IL gilts. You will still get reasonable inflation protection just not the RPI level. Also there have been many times where CPIH has been lower than just CPI.

Veloflyer

MetaPhysical said:

One of the things I have noted, certainly on Interactive Investor which is my platform, is that you can only acquire IL gilts via the telephone - you can't do it online.

I believe AJ Bell offer them online? 

Veloflyer

An interesting discussion and some worthwhile clarity and calculations - many thanks. I enjoyed the last comment from secret, which seems to me to be an excellent plan - i.e. use an ILG ladder for the basics, equity perhaps for anything else. The split to be determined....I also intended to have a 5 year cash pot as a buffer against any market crash, but I'd need far less to cover that than I would if I were 100% in equities.

Another option I had considered is an annuity for the basics. The rates seem pretty good at present and perhaps it could be argued the returns - especially with an index-linked annuity - would be an improvement over the ILG ladder. I do however fully appreciate the disadvantages - i.e. the inflexibility in case of emergencies, the inability to pass any remaining pot/part pot on, and I assume you cannot take advantage of the 25% lump sum? - as per drawdown....   

MallyGirl

When you buy an annuity from a pension it is with the 75% and you take the 25% tax free at the same time

Veloflyer

MallyGirl said:

When you buy an annuity from a pension it is with the 75% and you take the 25% tax free at the same time

Thanks for that - it gives the annuity option more appeal. Is it enough to beat the ILG ladder option I wonder ? 

MallyGirl

Veloflyer said:

MallyGirl said:

When you buy an annuity from a pension it is with the 75% and you take the 25% tax free at the same time

Thanks for that - it gives the annuity option more appeal. Is it enough to beat the ILG ladder option I wonder ? 

That would depend on your definition of 'beat'. Annuity winners are those who live long (and prosper)

SVaz

That’s interesting about the 2030  changes.
If inflation is low/on target over the next decade then who would ‘win’ ? 

My ordinary Gilts mature from 2034-38 paying an average 4% coupon plus about £600 capital gain for buying under par.  I’ll get around £4500 in coupons and interest.  I’m not counting platform fees of .35% as I’d be paying regardless.  

So,  £15k in total on £10k face value. 

IL Gilts for the same period are paying 0.75-1.00% ,  so say 10% for simplicity ,  £10k becomes £11k,  if inflation is a target 2.5% x 10 years then £11k is uplifted to £13750.  

If you’ve bought over par then you lose some of the gain I assume and vice/versa. 

 

So it’s a gamble on inflation,   It would have to be over 3.5% for ILs to win.  

That’s if my rough maths is right and I haven’t overlooked anything. 

Alexland

Veloflyer said:

MallyGirl said:

When you buy an annuity from a pension it is with the 75% and you take the 25% tax free at the same time

Thanks for that - it gives the annuity option more appeal. Is it enough to beat the ILG ladder option I wonder ? 

If you retire early you can do both - build a long enough IL gilt ladder then later trade in what's left of it for a lifetime annuity while it's still fairly even chances that you will / will not outlive the average life expectancy.

That way you are not putting all your capital at risk during the first decade (or two) of retirement in-case you die early and you can reassess the need to insure the longevity risk closer to the time and if your health is bad it might not even use all of your remaining ladder valuation so there might be the chance to both buy an annuity and leave something behind.

The annuity you will get offered later will still likely be priced on the remaining gilts you already hold (provided they go out far enough) unless there is some dramatic increase in life expectancy or industry profit margins.