Gilt Ladder In Pension Fund

MK62

OldScientist said:

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.

A small observation.......for a 65yo couple with a legacy motive, why a 20 year guarantee on the IL annuity and not 30 years? (as the gilt ladder is guaranteed to pay out for 30 years). 

OldScientist

MK62 said:

OldScientist said:

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.

A small observation.......for a 65yo couple with a legacy motive, why a 20 year guarantee on the IL annuity and not 30 years? (as the gilt ladder is guaranteed to pay out for 30 years). 

Mainly because the moneyhelper annuity tool crashed on me yesterday and I wasn't able to get it working again before I posted (so I recalled a result I'd previously looked at)!

However, here are the payout rates (in %) for a 65yo couple (100% beneficiary, RPI), with different guarantee periods (in years). I've quoted the values to 2 decimal places because the changes are small.

G.Period  Payout (%)
0               4.43
10             4.43
20             4.36
30             4.04

This compares with the 4.29% (for a 30 year ladder) and 3.84% for a 35 year ladder.

The longer the guarantee period, the closer the payout rate gets to that of the ladder. This is because with a 30 year guarantee period, the first 30 years of the annuity are essentially a ladder with no mortality credits. However, the annuity fees then reduce the payout rate to below that of the ladder. In comparing the two, the advantage of the annuity is it will provide income beyond 30 years, whereas the 30 year ladder will not - whether this is worth the slightly reduced payout rate will be an tricky decision.

For completeness, for single life RPI annuity (at 65yo), the payout rates are 5.3%, 5.2%, 4.8%, and 4.2% for guarantee periods of 0, 10, 20, and 30 years, respectively. Again, with a 30 year guarantee period, the annuity payout rate is slightly below that of the 30 year ladder.

MK62

OldScientist said:

MK62 said:

OldScientist said:

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.

A small observation.......for a 65yo couple with a legacy motive, why a 20 year guarantee on the IL annuity and not 30 years? (as the gilt ladder is guaranteed to pay out for 30 years). 

Mainly because the moneyhelper annuity tool crashed on me yesterday and I wasn't able to get it working again before I posted (so I recalled a result I'd previously looked at)!

However, here are the payout rates (in %) for a 65yo couple (100% beneficiary, RPI), with different guarantee periods (in years). I've quoted the values to 2 decimal places because the changes are small.

G.Period  Payout (%)
0               4.43
10             4.43
20             4.36
30             4.04

This compares with the 4.29% (for a 30 year ladder) and 3.84% for a 35 year ladder.

The longer the guarantee period, the closer the payout rate gets to that of the ladder. This is because with a 30 year guarantee period, the first 30 years of the annuity are essentially a ladder with no mortality credits. However, the annuity fees then reduce the payout rate to below that of the ladder. In comparing the two, the advantage of the annuity is it will provide income beyond 30 years, whereas the 30 year ladder will not - whether this is worth the slightly reduced payout rate will be an tricky decision.

For completeness, for single life RPI annuity (at 65yo), the payout rates are 5.3%, 5.2%, 4.8%, and 4.2% for guarantee periods of 0, 10, 20, and 30 years, respectively. Again, with a 30 year guarantee period, the annuity payout rate is slightly below that of the 30 year ladder.

....which is what I was getting at really.

For a couple concerned with early expiry legacy, the choice between the ladder and annuity, (given similar requirements and attributes), basically comes down to the longevity insurance you get with the annuity (should you live beyond 95) vs the ladder's slightly increased income (c.6%) during the ladder's life along with the extra flexibility you'd have should your circumstances change. 
Only the couple making the choice can decide which option is more desirable.

MetaPhysical

The closer you get to retirement - I am retiring next week - annuities become increasingly attractive.  We may scoff at them when in the accumulation phase when you've still got your salary to give you the ability to scoff but guaranteed income becomes a big thing when that income has gone. "Guaranteed" is a big word.  I'm keeping my powder dry for now because I can always a buy an annuity further down the line but I'll live off of my DB pensions and DC pot (a blend of equities, gilts, bonds and MM funds) for now.

tigerspill

MetaPhysical said:

The closer you get to retirement - I am retiring next week - annuities become increasingly attractive.  We may scoff at them when in the accumulation phase when you've still got your salary to give you the ability to scoff but guaranteed income becomes a big thing when that income has gone. "Guaranteed" is a big word.  I'm keeping my powder dry for now because I can always a buy an annuity further down the line but I'll live off of my DB pensions and DC pot (a blend of equities, gilts, bonds and MM funds) for now.

I don't think people necessarily scoff at annuities.  There was a period where they were very poor value and at that time, drawdown may have been a better option for many.  Value has come back a bit making them a better option now than before.
There is no one size fits all so if an annuity works for you, then that's the direction you should consider.

Veloflyer

MetaPhysical said:

The closer you get to retirement - I am retiring next week - annuities become increasingly attractive.  We may scoff at them when in the accumulation phase when you've still got your salary to give you the ability to scoff but guaranteed income becomes a big thing when that income has gone. "Guaranteed" is a big word.  I'm keeping my powder dry for now because I can always a buy an annuity further down the line but I'll live off of my DB pensions and DC pot (a blend of equities, gilts, bonds and MM funds) for now.

I agree with the sentiment. The "guarantee" aspect is certainly attractive for me also. The difficulty I have is whether that guarantee is kept within drawdown via an ILG gilt ladder, else outside of it with an annuity. From previous posts, they seem to offer similar returns up to around 20 odd years after which the annuity would seem to win out. It then perhaps boils down to whether the flexibilty and ability to pass on any remaining funds offered by drawdown is enough to compensate.    

OldScientist

MK62 said:

OldScientist said:

MK62 said:

OldScientist said:

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.

A small observation.......for a 65yo couple with a legacy motive, why a 20 year guarantee on the IL annuity and not 30 years? (as the gilt ladder is guaranteed to pay out for 30 years). 

Mainly because the moneyhelper annuity tool crashed on me yesterday and I wasn't able to get it working again before I posted (so I recalled a result I'd previously looked at)!

However, here are the payout rates (in %) for a 65yo couple (100% beneficiary, RPI), with different guarantee periods (in years). I've quoted the values to 2 decimal places because the changes are small.

G.Period  Payout (%)
0               4.43
10             4.43
20             4.36
30             4.04

This compares with the 4.29% (for a 30 year ladder) and 3.84% for a 35 year ladder.

The longer the guarantee period, the closer the payout rate gets to that of the ladder. This is because with a 30 year guarantee period, the first 30 years of the annuity are essentially a ladder with no mortality credits. However, the annuity fees then reduce the payout rate to below that of the ladder. In comparing the two, the advantage of the annuity is it will provide income beyond 30 years, whereas the 30 year ladder will not - whether this is worth the slightly reduced payout rate will be an tricky decision.

For completeness, for single life RPI annuity (at 65yo), the payout rates are 5.3%, 5.2%, 4.8%, and 4.2% for guarantee periods of 0, 10, 20, and 30 years, respectively. Again, with a 30 year guarantee period, the annuity payout rate is slightly below that of the 30 year ladder.

....which is what I was getting at really.

For a couple concerned with early expiry legacy, the choice between the ladder and annuity, (given similar requirements and attributes), basically comes down to the longevity insurance you get with the annuity (should you live beyond 95) vs the ladder's slightly increased income (c.6%) during the ladder's life along with the extra flexibility you'd have should your circumstances change. 
Only the couple making the choice can decide which option is more desirable.

I'm largely in agreement with you, except over the flexibility argument where I would suggest that using the risk portfolio for flexibility is potentially a better option. You're entirely right that rungs can be spent early in a ladder, but this a) shortens the ladder (so increases longevity risk) and b) where yields have risen, prices may be low.

Alexland

Veloflyer said:
It then perhaps boils down to whether the flexibilty and ability to pass on any remaining funds offered by drawdown is enough to compensate.    

Yes for me that's the main reason I intend to run an gilt ladder for a couple of decades before trading in the remainder for an annuity. It would be really annoying to have bought an annuity and then either develop a qualifying condition that would have produced more income or to die early (with an annoyed look on my face) although there are some options on the duration of guarantee years you can get.

Either way my current plan is hybrid with equities as I don't have enough trust to put all my eggs in one counterparty.

If we see interest rates go down enough and gilts pull forward a lot of value and yields start looking unattractive again then I might cash in my gains and change my plan. If it goes the other way I don't care as I'm getting the promised real returns by holding to redemption and it would actually help my coupon reinvestment buying at higher yields. I win whatever happens.

I've started my IL gilt ladder by just buying TR50 as it has the highest real yield and is roughly in the middle of my retirement and over the next few years I will sell some of it to buy others if their yields are looking more attractive as the yield curve changes shape aiming to get to my target ladder layout by retirement in around a decade.

MK62

OldScientist said:

MK62 said:

OldScientist said:

MK62 said:

OldScientist said:

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.

A small observation.......for a 65yo couple with a legacy motive, why a 20 year guarantee on the IL annuity and not 30 years? (as the gilt ladder is guaranteed to pay out for 30 years). 

Mainly because the moneyhelper annuity tool crashed on me yesterday and I wasn't able to get it working again before I posted (so I recalled a result I'd previously looked at)!

However, here are the payout rates (in %) for a 65yo couple (100% beneficiary, RPI), with different guarantee periods (in years). I've quoted the values to 2 decimal places because the changes are small.

G.Period  Payout (%)
0               4.43
10             4.43
20             4.36
30             4.04

This compares with the 4.29% (for a 30 year ladder) and 3.84% for a 35 year ladder.

The longer the guarantee period, the closer the payout rate gets to that of the ladder. This is because with a 30 year guarantee period, the first 30 years of the annuity are essentially a ladder with no mortality credits. However, the annuity fees then reduce the payout rate to below that of the ladder. In comparing the two, the advantage of the annuity is it will provide income beyond 30 years, whereas the 30 year ladder will not - whether this is worth the slightly reduced payout rate will be an tricky decision.

For completeness, for single life RPI annuity (at 65yo), the payout rates are 5.3%, 5.2%, 4.8%, and 4.2% for guarantee periods of 0, 10, 20, and 30 years, respectively. Again, with a 30 year guarantee period, the annuity payout rate is slightly below that of the 30 year ladder.

....which is what I was getting at really.

For a couple concerned with early expiry legacy, the choice between the ladder and annuity, (given similar requirements and attributes), basically comes down to the longevity insurance you get with the annuity (should you live beyond 95) vs the ladder's slightly increased income (c.6%) during the ladder's life along with the extra flexibility you'd have should your circumstances change. 
Only the couple making the choice can decide which option is more desirable.

I'm largely in agreement with you, except over the flexibility argument where I would suggest that using the risk portfolio for flexibility is potentially a better option. You're entirely right that rungs can be spent early in a ladder, but this a) shortens the ladder (so increases longevity risk) and b) where yields have risen, prices may be low.

True, but circumstances can change significantly over time......eg a terminal illness diagnosis at say 80 for instance.....the point is that with an annuity you are locked into that path come what may, but a ladder gives you some flexibility, should you choose to use it.  You could use the risk portfolio, assuming you actually had one of course, but the same argument applies about prices being low, perhaps even more so.......and you don't necessarily have to shorten the ladder, you can reduce it's annual payout in return for an immediate (OK, a few weeks) lump sum.

OldScientist

MK62 said:

OldScientist said:

MK62 said:

OldScientist said:

MK62 said:

OldScientist said:

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.

A small observation.......for a 65yo couple with a legacy motive, why a 20 year guarantee on the IL annuity and not 30 years? (as the gilt ladder is guaranteed to pay out for 30 years). 

Mainly because the moneyhelper annuity tool crashed on me yesterday and I wasn't able to get it working again before I posted (so I recalled a result I'd previously looked at)!

However, here are the payout rates (in %) for a 65yo couple (100% beneficiary, RPI), with different guarantee periods (in years). I've quoted the values to 2 decimal places because the changes are small.

G.Period  Payout (%)
0               4.43
10             4.43
20             4.36
30             4.04

This compares with the 4.29% (for a 30 year ladder) and 3.84% for a 35 year ladder.

The longer the guarantee period, the closer the payout rate gets to that of the ladder. This is because with a 30 year guarantee period, the first 30 years of the annuity are essentially a ladder with no mortality credits. However, the annuity fees then reduce the payout rate to below that of the ladder. In comparing the two, the advantage of the annuity is it will provide income beyond 30 years, whereas the 30 year ladder will not - whether this is worth the slightly reduced payout rate will be an tricky decision.

For completeness, for single life RPI annuity (at 65yo), the payout rates are 5.3%, 5.2%, 4.8%, and 4.2% for guarantee periods of 0, 10, 20, and 30 years, respectively. Again, with a 30 year guarantee period, the annuity payout rate is slightly below that of the 30 year ladder.

....which is what I was getting at really.

For a couple concerned with early expiry legacy, the choice between the ladder and annuity, (given similar requirements and attributes), basically comes down to the longevity insurance you get with the annuity (should you live beyond 95) vs the ladder's slightly increased income (c.6%) during the ladder's life along with the extra flexibility you'd have should your circumstances change. 
Only the couple making the choice can decide which option is more desirable.

I'm largely in agreement with you, except over the flexibility argument where I would suggest that using the risk portfolio for flexibility is potentially a better option. You're entirely right that rungs can be spent early in a ladder, but this a) shortens the ladder (so increases longevity risk) and b) where yields have risen, prices may be low.

True, but circumstances can change significantly over time......eg a terminal illness diagnosis at say 80 for instance.....the point is that with an annuity you are locked into that path come what may, but a ladder gives you some flexibility, should you choose to use it.  You could use the risk portfolio, assuming you actually had one of course, but the same argument applies about prices being low, perhaps even more so.......and you don't necessarily have to shorten the ladder, you can reduce it's annual payout in return for an immediate (OK, a few weeks) lump sum.

Fair enough - you mean spending, say, 10% or more of each rung at 80 (assuming 15 years remaining in the ladder, the target spend would be about 6.7%, i.e. 1/15).

I suspect it would be unusual to commit your entire portfolio to guaranteed income at retirement since it reduces diversification, so most retirees who have constructed a ladder or bought an annuity (or have a DB pension) would probably continue to have a residual risk portfolio. What that residual portfolio consists of is another discussion. FWIW, our guaranteed income forms a significant proportion of our annual income (a proportion that will increase to near enough 100% at SP age) yet we still retain fixed income (bond funds and cash with an average target duration of 1 to 2 years) in our risk portfolio in order to reduce volatility (currently 67/33, but gradually working to a target of 80/20 at SP age).