Should I Delay Buying Gilt Ladder

dawsonrm

I was intending to setup a 5 year index linked Gilt Ladder in the next couple of weeks with the first year maturing in 2035. The money is currently sitting in a Money market fund.

With the strong possibility now of rising inflation and interest rates would there be any benefit in delaying the purchase?

My feeling is for index linked gilts it doesn't make much difference but would be interested in any other opinions.

QrizB

I agree; if you're planning to hold them until redeemed (which is the usual case with a gilt ladder) it shouldn't make much difference for IL gilts.

OldScientist

Buying a 5 year ILG ladder today with payments deferred until 2035 (at least according to https://lategenxer.streamlit.app/Gilt_Ladder ) would have a withdrawal rate of 22.6% and a real yield of 1.1% (i.e., a real income of £12k per year for five years from 2035 would currently cost £53k). Apart from the reinvestment of coupons, this is (in the absence of UK debt default) certain.

The effect of a delay on constructing the ladder then depends on two things

1. The real return on the money in the MMF (currently about 0.55%, i.e., 3.75% nominal minus 3.2% for current inflation)
2. The real yield of ILG when you come to purchase the ladder (this could be higher or lower than currently).

Neither of these is known and therefore, the effect of delaying the construction of the ladder is also unknown.

So, the question then becomes how important is this ladder to your retirement plans and how much certainty do you want/need?

ali_bear

Are you doing this within a pension wrapper or outside. The advantage of IL gilts is the typically lower coupon attracts less income tax if you are outside of a pension or ISA wrapper.

DRS1

I read something that said that UK gilts had been hit worse (by the fallout from Trump's assault on Iran) than govt. bonds elsewhere (even the PIIGS) so maybe it is a good time to buy - unless you think the prices will fall further.

Nebulous2

Would what you can currently get a ladder for, meet your needs, at a price you are willing to pay?

If it will then delaying it gets you into timing the market. Like buying foreign currency, investing in the stockmarket, deciding to sell an index fund because you think prices are too high.

The experts on here all insist that we cannot time the market, even the professionals get it wrong more often than right, so its a mugs game.

However you, I, and probably almost everyone else on here, even these experts, are regularly tempted to try.

As per Dirty Harry. Do you feel lucky?

Veloflyer

I am similar to the OP but thinking of a 5 year gilt ladder maturing each year from 2027 to 2031 inclusive - simply to protect the pot until SP kicks in in 2031

Not sure whether to plump for ordinary gilts or index-linked

Storcko14

Maybe start with the question "why not ILGs?". I'm definitely not a gilts expert so not saying that's the right question but… geopolitics.

QrizB

https://forums.moneysavingexpert.com/discussion/comment/81912506#Comment_81912506

I have a six-year ladder covering a similar period but extending to 2032 (which is when I might be claiming my DB).

The first few years are nominal gilts, the later ones are IL.

I'm not necessarily recommending this strategy, just sugesting that it doesn't have to be a simple one-or-the-other approach!

dawsonrm

Thanks for the replies. I completely understand timing the market is generally not advisable but I guess what I was really trying to understand was the link between rising inflation and interest rates and the cost of setting up the ladder.

My thinking was that for conventional gilts it would possibly become cheaper as inflation rises but for index linked gilts it would make little difference as inherently the maturity and coupon value moves with inflation anyway.

SnowMan

https://forums.moneysavingexpert.com/discussion/comment/81912755#Comment_81912755

I think you are right there.

As you say if inflation is more likely to go up because of the oil crisis and interest rates are now less likely to come down and more likely to go up in order that interest rates (under conventional monetary policy) can control that inflation then the attractiveness of the fixed yield on nominal conventional gilts reduces and so the price should fall (and nominal yield should rise) as has happened.

When expected inflation goes up and interest rates are expected to not reduce or even go up to control that inflation then that should not affect index linked gilts, if the increase in interest rate expectations balances the expected increase in inflation, that is if expected real interest rates stay the same.

It's slightly surprising that real yields on index linked gilts have increased a bit since events in Iran (and so prices have fallen), but those real yields are still lower (and prices higher) than they were a month ago.

I can't see any reason not to instigate an index linked gilts bonds ladder beacuse of what has happened in Iran. If anything there is more reason to do so.