Gilt Ladder In Pension Fund

Alexland

SVaz said:

It would have to be over 3.5% for ILs to win.  

Conventional gilts maturing in the period 2034-38 currently have a yield of between 4.388% and 4.793% (4.6%)
https://www.dividenddata.co.uk/uk-gilts-prices-yields.py

IL gilts maturing in the period 2034-38 currently have a real yield of between 1.426% and 1.793% (1.6%)
https://www.dividenddata.co.uk/index-linked-gilts-prices-yields.py

So the difference is 3% but the point of holding IL gilts is not to 'win' a gamble it's to say that whatever happens with inflation you have certainty of spending power so you don't have to worry about events like the 28% inflation we have seen in the past 5 years.

SVaz

Yes I know,
 just playing devil’s advocate.

Inflation is ‘expected’ to drop to around 2.7% by this time next year but we all know how reliable projections are.
If I build another ladder beyond 2038 then it would be crazy not to use linkers.   

The prices of the ones I have my eye on are all quite high so that must cut into the gain on maturity. 

tigerspill

SVaz said:

Yes I know,
 just playing devil’s advocate.

Inflation is ‘expected’ to drop to around 2.7% by this time next year but we all know how reliable projections are.
If I build another ladder beyond 2038 then it would be crazy not to use linkers.   

The prices of the ones I have my eye on are all quite high so that must cut into the gain on maturity. 

For me, ILGs are about one thing - preserving spending power.  Anything on top of this is a bonus in my thinking.  So, as long as I buy at a clean price of under 100, then that will work out as long as I hold to maturity.  This is my plan along with savings for short term / medium - covering around 10 years. 
I have equity and MA funds for beyond this.  What I am doing is moving money from my MA (mainly Vanguard VLS and HSBC) to ILGs to offer more certainty.  Moving away from MA funds will give me a little more decumulation control.

I have to say, there are some on this forum in recent weeks who have put a lot of time and effort into helping me (and others) understand ILGs.  Huge thanks you you guys!  Absolute stars.

gonboating

I second Tigerspill's thanks. I have learnt a huge amount from a standing start from just a couple of the threads here and has cleared my mind regarding imminent options .
One observation I might make is that in constructing a gilts ladder it doesn't appear to have to be either/or and can be a combination of Gilts and ILGs?

Secret2ndAccount

Veloflyer said:

...
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....   

If you do a head-to-head comparison - price up a 10 or 20 year annuity vs an equivalent gilt ladder- the annuity pays out slightly less. The middleman takes his cut. It's not egregious though. If you are unable to build and manage your own ladder, or if you feel you might not be able to at age 80, or if you just want a regular monthly payment, the annuity is not so expensive as to be a bad purchase.
The big plus of the gilt ladder is the abiity to cash in if you change your mind, or to pass it on by inheritance.
The reason I bought an annuity was that I wanted longevity insurance. You build a gilt ladder for, say, 20 years. What happens in the 21st year? Gilt ladder is exhausted, but the annuity keeps on paying.
The key, I think, is to decide what it is that you need, and then purchase that. I have a good sized pot and I really feel I'm going to be fine. Therefore I felt I could afford insurance against some possible risks: 1. High inflation;  2. Poor equity returns;  3. Living to a very old age.    Index linked annuity was an insurance policy against all three. Gilt ladder wouldn't have dealt with point 3. As Alexland points out, you could start with a gilt ladder, then cash it in and buy an annuity later. I was only annuitising a small amount, so I went for it while rates and cognitive abilities are both good. I already have a DB pension from an old employment, so I just topped up the guaranteed income to match my baseline needs. From age 67, I will have annual income of 29-30k in today's money, plus still a 'fortunate person' sized pot to spend on fun, or more likely medical treatments.

gonboating

Veloflyer said:

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....   

Hopefully not a thread drift but one of the reasons I am inclining towards the ladder option is the relatively complex process of drilling down the the type of annuity even before you try to analyse the cost: length, indexation,joint or single life health issues etc. Really difficult to process whereas (as people have said above) the beauty of the ladder is  its (relative) simplicity and the ability if you want down the road to cash up and go a different route. My understanding is once you commit the annuity you are committed irrespective of life changes.

Secret2ndAccount

tigerspill said:

For me, ILGs are about one thing - preserving spending power.  Anything on top of this is a bonus in my thinking.  So, as long as I buy at a clean price of under 100, then that will work out as long as I hold to maturity.  This is my plan along with savings for short term / medium - covering around 10 years. 
I have equity and MA funds for beyond this.  What I am doing is moving money from my MA (mainly Vanguard VLS and HSBC) to ILGs to offer more certainty.  Moving away from MA funds will give me a little more decumulation control.

Exactly! If you want big returns, go for equities. Gilts are about locking in security.
Index linked gilts are currently building in an implied inflation rate of 3%. Hands up anyone who thinks inflation is going to average less than 2% over the next 10 years. If it is 2%, you lose out slightly - you still get back your investment + inflation + profit; it's just slightly less than a fixed gilt would have returned. If inflation turns out to be 8%, those fixed gilts at 4.5% are going to look pretty ugly. ILG would return double the fixed rate. Even if inflation unexpectedly sits at zero the entire time, I feel my portfolio is better able to cope with that than with the consequences of a number of years at >8% so I choose ILG as insurance against a bad, but entirely possible pattern of inflation.
So, when you buy the ILG you are effectively getting the insurance against high inflation for next to zero cost. For info, during my time on this planet, inflation has been above 8% for 1/4 of the time, and above 3% for 60% of the time.

Veloflyer

Again, all useful comments - many thanks. Key takeaways for me

Index linked would seem to be advisable - be it gilt ladder or annuity. I simply do not believe inflation is going to average at 2 or even 3% over the next 10/20 years. My view is it will be higher - and certainly higher than the official rate would suggest. 

I'd still like to remain in equities. By what % I know not, but 50% of the pot in low cost largely global trackers does not seem unreasonable. 

Cash buffer of x to offset a market crash 

I'm still working - just! - and at 61, I am tempted to lock in the security of 50% of the pot so the basics are covered. I am not withdrawing anything from the pot at present, but there is always the possibility of saying a tearful farewell to work at any moment. The only thing seemingly keeping me there are the delicious fresh croissants when I get in!

Frequently in my mind is some advice from an elderly, now incapacitated, relative - do what you always wanted to do - whilst you still can.....        

OldScientist

For those interested, annualised inflation since 1932 (when the UK came off the gold standard) has been a shade under 4.5%. The BoE target is just that – a target that might be achievable under fairly steady conditions. External shocks (e.g., the recent increase in gas prices or the increase in oil prices in the 1970s) are difficult to control with interest rates and inflation will then rise.

A comparison of lifetime RPI annuities and inflation linked ladders can be done reasonably easily

For example, a single life RPI annuity taken at 65yo with 5 year guarantee has a payout rate of 5.3% (priced on 6/12/2025, see https://www.williamburrows.com/calculators/annuity-tables/)

A joint life (100% beneficiary) taken at 65yo with 5 year guarantee has a payout rate of 4.6%

A 30 year ILG ladder currently has a payout rate of 4.3% (see https://lategenxer.streamlit.app/Gilt_Ladder ). This would take 65yo retirees to 95yo. There is roughly a 10% chance of each living to that age, so for a couple the probability of at least one living to that age is roughly 20% (see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 updated in February 2025). To be more certain of providing a lifetime income, the payout rate for 35 years (i.e., to 100yo, where there is still a chance of one for both retirees exceeding that age of about 10%) is 3.9%.

Ensuring the ladder will cover a lifetime drops the payout rate to significantly below the payout rate for the annuity (even compared to the joint annuity).

Adding a longer guarantee to the annuity, e.g., 20 years reduces the payout rate by about 50bp for the single life annuity and by about 20bp (IIRC) for the joint life annuity, but would ensure some legacy in the event of early death.

The income from the annuity ladder (edit:thanks for my error being pointed out!) is ‘lumpy’ (e.g., there are currently no ILGs maturing between November 2042 and March 2044 and from March 2046 and November 2047) and will need managing (the cashflow tab on the excellent lategenxer tool will help with this, although the amounts will need to be updated by realised inflation – on ongoing calculation).

There is still a small possibility that the retiree will live beyond 100yo and outlive even the 35 year ladder.

For the single retiree with no legacy motive, the annuity provides significantly higher income (or the same income with a smaller portion of the pot).

For a couple with a legacy motive, the comparison is a bit tighter (e.g., a payout rate of about 4.4% with a 20 year guarantee compared to 4.3% for a 30 year ladder or 3.9% for a 35 year ladder) and would need more thought.

Of course, it is always possible to use both (e.g., shorter ladders to tailor spending towards the beginning of retirement, etc.)!

Veloflyer

The above is most interesting - many thanks. My initial thoughts would perhaps be to transfer 50% of the pot to an ILG ladder whilst I am still working  - simply to preserve that 50% - and to think more seriously about an index linked annuity for that 50% when I cease working. The other 50% to remain in equities -  to draw down from for anything other than the basics.