Gilt ladder in SIPP - some not availiable gilts in platform

incus432

MK62 said:

With the lategenexer gilt ladder tool, when used for IL gilts, be aware that the cashflow balance is adjusted for assumed inflation (so it appears not to add up correctly).......can be a bit confusing at first.

I'm using convetional gilts but yes I find the IL sheet completely baffling. 

incus432

DRS1 said:

incus432 said:

T41H pays a high 5.25% coupon so buying a lower coupon gilt instead would mean a shortfall in income until it matures. So It's a cashflow issue. Would have to leave enough cash float to cover it. 

Has anyone made an Excel spreadsheet where you can input gilts and quantities to then show cashflow? I am doing it myself but it is very tedious

There is a cashflow bit in lategenxer.  It is the tab next to Implementation.

Sorry yes ,I'm aware of that but the figures in the downloaded sheets are just numbers not formulae, so changing (eg) the number of units held doesnt feed through to allow you to study say changing one bond for another

incus432

MK62 said:

With the lategenexer gilt ladder tool, when used for IL gilts, be aware that the cashflow balance is adjusted for assumed inflation (so it appears not to add up correctly).......can be a bit confusing at first.

May I pick your brains on this? - I'm unclear what this tool is giving me on the IL gilt option

If I ask for an annual income of 10,000 annually for 20 years using IL gilts, the cashflow shows 10k being paid out yearly, but will the reality be 10k adjusted by inflation?  The tool's notes state it assumes RPI of 3% - I'm confused - the 10k suggests to me it's using 0%. I expected to see the annual payout increasing by assumed inflation rate.  If RPI is higher how does that affect ithe cashflow figures? 

Thanks in advance

michaels

Another question on the lategenexer tool and the interest rate on money not in the bonds (coupons, money where the draw down date differs from the ILG maturity date) - is the assumed interest you are asked to enter the gross rate or the rate after assumed inflation?

coyrls

incus432 said:

MK62 said:

With the lategenexer gilt ladder tool, when used for IL gilts, be aware that the cashflow balance is adjusted for assumed inflation (so it appears not to add up correctly).......can be a bit confusing at first.

May I pick your brains on this? - I'm unclear what this tool is giving me on the IL gilt option

If I ask for an annual income of 10,000 annually for 20 years using IL gilts, the cashflow shows 10k being paid out yearly, but will the reality be 10k adjusted by inflation?  The tool's notes state it assumes RPI of 3% - I'm confused - the 10k suggests to me it's using 0%. I expected to see the annual payout increasing by assumed inflation rate.  If RPI is higher how does that affect ithe cashflow figures? 

Thanks in advance

The values shown are current real value after inflation and so will appear as if 0% inflation is applied.  The reason you have to provide an RPI figure and a savings account figure is that income from the gilts is assumed to be put into a savings account rather than reinvested in the gilt (a realistic assumption).  If you set the savings figure at 2% and the RPI figure at 3%, you will see the real value of your savings reduce rather than increase.

In answer to the second question, the rate you put for savings is the nominal rate, not the real rate after inflation.  The tool will reduce the rate you provide by its assumed inflation figure (3%).

incus432

coyrls said:

The values shown are current real value after inflation and so will appear as if 0% inflation is applied.  The reason you have to provide an RPI figure and a savings account figure is that income from the gilts is assumed to be put into a savings account rather than reinvested in the gilt (a realistic assumption).  If you set the savings figure at 2% and the RPI figure at 3%, you will see the real value of your savings reduce rather than increase.

I must be missing something as I don't see any way to 'provide an RPI figure' - only marginal income tax rate and cash interest rate. The former is zero in a SIPP, the latter the rate my platform pays on cash balances (2.9% to 31Jan, 2.69% after).  It seems to use a fixed 3% RPI figure.

I now understand the main point about future figures being discounted by RPI. Not the most intuitive way to present it perhaps, especially as there is no similar adjustment for a conventional gilt ladder

michaels

incus432 said:

coyrls said:

The values shown are current real value after inflation and so will appear as if 0% inflation is applied.  The reason you have to provide an RPI figure and a savings account figure is that income from the gilts is assumed to be put into a savings account rather than reinvested in the gilt (a realistic assumption).  If you set the savings figure at 2% and the RPI figure at 3%, you will see the real value of your savings reduce rather than increase.

I must be missing something as I don't see any way to 'provide an RPI figure' - only marginal income tax rate and cash interest rate. The former is zero in a SIPP, the latter the rate my platform pays on cash balances (2.9% to 31Jan, 2.69% after).  It seems to use a fixed 3% RPI figure.

I now understand the main point about future figures being discounted by RPI. Not the most intuitive way to present it perhaps, especially as there is no similar adjustment for a conventional gilt ladder

I guess the intuition is that the ILG bond return is fixed in real terms, hence working in real terms.  Modelling in a 3% default inflation rate in conjunction with returns on funds outside the linkers is less intuitive, perhaps more sensible would be to assume a zero RPI for purposes of the simulation and then you could enter the interest rate on 'cash' as being relative to RPI?

MK62

incus432 said:

MK62 said:

With the lategenexer gilt ladder tool, when used for IL gilts, be aware that the cashflow balance is adjusted for assumed inflation (so it appears not to add up correctly).......can be a bit confusing at first.

May I pick your brains on this? - I'm unclear what this tool is giving me on the IL gilt option

If I ask for an annual income of 10,000 annually for 20 years using IL gilts, the cashflow shows 10k being paid out yearly, but will the reality be 10k adjusted by inflation?  The tool's notes state it assumes RPI of 3% - I'm confused - the 10k suggests to me it's using 0%. I expected to see the annual payout increasing by assumed inflation rate.  If RPI is higher how does that affect ithe cashflow figures? 

Thanks in advance

Here's what the tool's author said in response to a similar query last year.....

LateGenXer wrote

The problem is in the interpretation of those figures. As stated on the top of the Cash Flow tab, "Amounts shown below are in today's money, i.e.,. discounted by assumed inflation."

That is, every day that passes by, the previous balance gets depreciated due to inflation (assumed to be at 3%.)

In other words, on your spreadsheet, in the "Corrected" column, you can't just add the previous balance, but rather calculate how many days passed, and discount the previous balance by 3% a year, then use that as base balance. Or alternatively, convert all values from real to nominal (again, assuming 3% annual inflation) and then check all additions. (this is how this is actually calculated.)

It's not the first time this mismatch confuses users, so I need to communicate or represent this better somehow. I can easily add a warning to this effect. I could also add extra columns to the cash flow table with the nominal values, but I wonder if that 's too much detail.

The withdrawals are indeed adjusted for future inflation.....but as that is not known, all that can be said today, in your example case, is that future withdrawals will be the equivalent of £10,000 today.
The cashflow balance is just an example illustration with inflation assumed to be 3%.........the actual values will vary with inflation and interest rates, but the key point is that the withdrawals will be the equivalent of £10000 today (assuming the interest rate used in the tool matches the real rates you actually get (and hence the warning about selecting a conservative rate))

It's really just the same as any savings account.......if you put £1000 in the account in January, then by next January the amount may have increased to £1040 (assuming a 4% interest rate), but the value of that £1040 will have been eroded by inflation......by how much depends on that inflation, but at 3% RPI, the value will be discounted to £1008.80.......at 5% it would be £988......and so on.

coyrls

incus432 said:

coyrls said:

The values shown are current real value after inflation and so will appear as if 0% inflation is applied.  The reason you have to provide an RPI figure and a savings account figure is that income from the gilts is assumed to be put into a savings account rather than reinvested in the gilt (a realistic assumption).  If you set the savings figure at 2% and the RPI figure at 3%, you will see the real value of your savings reduce rather than increase.

I must be missing something as I don't see any way to 'provide an RPI figure' - only marginal income tax rate and cash interest rate. The former is zero in a SIPP, the latter the rate my platform pays on cash balances (2.9% to 31Jan, 2.69% after).  It seems to use a fixed 3% RPI figure.

I now understand the main point about future figures being discounted by RPI. Not the most intuitive way to present it perhaps, especially as there is no similar adjustment for a conventional gilt ladder

You're right, you can't set the RPI figure, I was working from my faulty memory!

incus432

Being able to set and model different assumed RPIs would be a very useful addition. But this is all minor - it remains a very useful tool and many of us are very grateful to the originator for making it available. 

I can see both views on whether to show future withdrawals as discounted or not, but I do think it would better to have the same convention in both conventional and IL ladders so you can compare cashflows on the same basis. 

In the end for my own circumstances I chose a conventional gilt ladder, partly because then I know exactly what the future cashflows will be, and can set up automatic withdrawals, the only uncertaintly being future changes to the cash interest rate (which I can allow for by adding a bit more cash)