ILG ladder query

michaels

https://forums.moneysavingexpert.com/discussion/comment/81919595#Comment_81919595

The documentation is unclear on what rate you should use for this parameter. I think it may be the nominal rate that is then deflated by a fixed 3% inflation assumption but I could be wrong.…

MK62

It's the expected cash interest rate over the whole life of the ladder - obviously for a multi-year ladder this is going to be an estimation. The tool suggests checking out the BoE's overnight index swap (OIS) instantaneous nominal forward curve for the current estimation of long term interest rates, but then cautions to use a value well below the minimum.

The tool will build a ladder where all coupons are added to a cash account (or MMF etc), rather than being reinvested into the source gilts…..so the interest rate effect will vary depending on the gilts chosen (ie size of coupon), the coupon dates, the gilt maturity dates, the withdrawal dates etc. I'd suggest trying various values to see the effect - I use(d) 2% as the value.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81919890#Comment_81919890

I was ultra cautious and used zero! I am also thinking inflation may be on the rise given events, and now may be a good time to purchase an ILG ladder?

MK62

There is no way to know today whether a conventional gilt ladder or an index linked gilt ladder will be the better choice over the life of the ladder.......it's a judgement call / personal choice.......the market expects no difference (though what the market expects today and what actually happens over the next X years will likely not be the same)

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81920125#Comment_81920125

….but perhaps if I believe average inflation over the 5 year life will rise above the current break-even rate?

For sure I don't know for certain. I'd be rich if I did…..

MK62

https://forums.moneysavingexpert.com/discussion/comment/81920343#Comment_81920343

That's the judgement call......or guess......or leap of faith.......call it what you will......nobody can be certain.

Some might prefer the higher initial withdrawal from a conventional ladder with the trade-off of a gradual reduction in spending power, while others might prefer to take the lower initial withdrawal and maintain equivalent spending power throughout the life of the ladder......there's no real right or wrong here as long as you fully appreciate what you are getting.

There is always the middle ground too of course........a ladder of conventional gilts escalating at X% pa........and depending on the account the ladder is held in, tax might be a consideration too.

tigerspill

https://forums.moneysavingexpert.com/discussion/comment/81920125#Comment_81920125

I think that depends on what any of us means by "better". Better for me is locking in real value and hedge against inflation. So the choise to use ILGs was easy.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81920447#Comment_81920447

All understood, but the issue for me is more which way to jump if one believes average inflation over the 5 years will be higher than the break-even rate. I understand it to be ILGs if you believe it, if not, then conventional gilts - given the choice off the two.

That belief does indeed carry a good deal of uncertainty and is hugely subjective, but I am leaning towards thinking inflation will be higher, so for me ILGs may be the way to go.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81919375#Comment_81919375

I may be too simple minded for this question but if I look at the giltsyield page it has implied RPI growth for T27 of 4.55% and for T28 of 4.3%. Isn't that the figure you should be considering for those gilts - not 3.7%? Even T29 is 3.97%.

MarkCarnage

One observation on the gilt market which may have some relevance here….the nature of the market is changing. There is lower gilt issuance likely over the next year, particularly at the long dated end of the curve.
Pension fund demand for conventional gilts has reduced significantly as many DB schemes offload liabilities to insurers, who operate under a different regulatory regime and hold less direct gilts.

However, inflation protection is becoming more expensive particularly at the long end, leading to some decline in real yields and a spike up in market implied inflation at almost all maturities. Although demand from pension funds has also fallen, there is almost no supply.

These technical factors are therefore having a fair bit of effect on real yields and implied inflation. Not as evident at sub 5 year end of the market, but quite marked at 30 year plus. It tends to suggest that there is a bit of margin in implied inflation. However, current geopolitical issues may mean that's now needed.