ILG ladder query

MK62

When you said you were looking at a gilt ladder "for 100K withdrawal each year for 5 years as a means of preserving wealth until SP kicks in"……..can you explain exactly what you mean?

Are you actually going to withdraw £100k each year? (that wouldn't appear to be the way to preserve wealth, as the income tax bill would be significant), or are you going to leave the returns from the proposed ladder inside the pension?……if so, then on reflection I'm not sure a ladder is either required or the best option…….you might be better served just purchasing a single gilt with the required maturity date (ie sometime in 2030-2031??)……..

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81922742#Comment_81922742

I'd "withdraw" - and possibly incorrect terminology so apologies - 100K from the SIPP, take 25K TFLS and possibly 12K from the 75K crystallized. Repeat for each year until 2031.

More correctly perhaps, after maturity for each ILG, I'd request 25K TFLS and possibly ask for 1K/month income. As per the cash flow on the Streamlit tool perhaps?

This would cover predicted spend of @37K/ann for minimal tax until SP kicks in.

Single gilt 2030/31 would perhaps not be suitable. I need the cash each year - although all other ideas most welcome.

MK62

https://forums.moneysavingexpert.com/discussion/comment/81922842#Comment_81922842

The case for short maturity IL gilts is debatable in my view…….but in the end it will come down to opinion.

TBH, there are many ways to implement this……..eg you could look at a 5yr conventional gilt ladder paying your 37k pa, along with a single IL gilt, T30I……and take the required annual uplift to your 37k from T30I's coupons. Or you could create a conventional gilt ladder paying 37k pa increasing at say 6%pa, alongside a low coupon IL gilt, such as TR31…….but these are just two of many options.

If your pension platform operates two pots, one uncrystallised and the other crystallised, this might complicate matters a bit, as you'd need to move £100k pa from uncrystallised to crystallised pots in order to generate £25k pa TFLS

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81922892#Comment_81922892

I think for 5 years there isn't much in it as regards returns for either a conventional or IL gilt ladder, so the advantage of inflation protection for the IL would seem to swing it in these uncertain times.

I'd like to use the TFLS of 25K/ann and 12K/ann from the drawdown crystallized amount. This 12K is less than the PA so it seems a tax efficient way of realizing the 37K

The platform - Bell in my case - would, I assume on request, dump 25K into my current account, move 75K into crystallized and set up an income of 12K/ann from the latter. I understand when each gilt matures, the proceeds are held in the SIPP cash account, so I'd accrue 75K cash/ann crystallized less the 12K/ann on each yearly request for 25K TFLS.

Bell must surely do this as routine for many others so I cannot envisage any complexity.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/81922892#Comment_81922892

As I mentioned in an earlier post, different scenarios can also be tested rather than relying solely on opinion*.

In the following table, the annual nominal income per £100k invested is shown for a) a flat nominal ladder (current payout rate 22.55%) and b) an ILG ladder (current payout rate 19.54%) for different inflation rates between 0 and 10%

	Inflation	Y1	Y2	Y3	Y4	Y5	Sum
Nominal		22550	22550	22550	22550	22550	112750
ILG	0	19540	19540	19540	19540	19540	97700
ILG	1	19540	19735	19933	20132	20333	99674
ILG	2	19540	19931	20329	20736	21151	101687
ILG	3	19540	20126	20730	21352	21992	103741
ILG	4	19540	20322	21134	21980	22859	105835
ILG	5	19540	20517	21543	22620	23751	107971
ILG	6	19540	20712	21955	23272	24669	110149
ILG	7	19540	20908	22371	23937	25613	112369
ILG	8	19540	21103	22791	24615	26584	114633
ILG	9	19540	21299	23215	25305	27582	116941
ILG	10	19540	21494	23643	26008	28609	119294

A quick inspection shows that in terms of total nominal income (i.e., the column labelled sum) delivered, the crossover inflation is about 7% (which is higher than I was expecting since the difference in net yields is roughly 5%). However, I think my earlier assertion (based on a more limited set of calculations) that there is not much difference between a nominal ladder and an ILG ladder over a 5 year period holds since the total income only varies by 10% at most across the whole range.

I agree that there are multiple ways of doing this including constructing a nominal ladder with an escalation (the tool at https://lategenxer.streamlit.app/Gilt_Ladder allows escalation through the advanced parameter tab, so this could be modelled in the same way as above).

* I've a nagging feeling that in doing this calculation, I've forgotten something about the lategenxer tool, but it is early on a Sunday morning!

MK62

The OP is looking at a £500k ladder though…….a 10% variation in total return is £50k, which is significant imho, especially over such a short period (though I accept that's worst case).

The way the ladder is constructed, with no reinvestment of coupons, only 80% of initial sum actually invested, the use of 0% as the cash interest rate etc, all make the 5yr DMO breakeven rate figure of c.3.7% look somewhat irrelevant in this comparison.

You can test all the various scenarios, but as nobody knows which one will most closely resemble reality over the next 5 years, you have to form an opinion on which scenario you think it will most likely be.

BTW, in your table you haven't adjusted the first payout for inflation, which in turn affects all subsequent payouts. The £19540 is in today's money, so at eg 5% inflation, the first payout, in a year's time, would actually be £20517………I make the breakeven about 4.8% (still quite a difference to the DMO's 3.7% though, but inline with your difference in net yields). This would mean the difference across payout scenarios will be a fair bit below 10%, so my comment above re:50k will be wide of the mark too, if you ignore the very unlikely scenario of 0% inflation over the next 5 years…EDIT - actually, you'd need to ignore more than that…😉)

Veloflyer

BTW, in your table you haven't adjusted the first payout for inflation, which in turn affects all subsequent payouts. The £19540 is in today's money, so at eg 5% inflation, the first payout, in a year's time, would actually be £20517………I make the breakeven about 4.8% (still quite a difference to the DMO's 3.7% though, but inline with your difference in net yields). This would mean the difference across payout scenarios will be a fair bit below 10%, so my comment above re:50k will be wide of the mark too, if you ignore the very unlikely scenario of 0% inflation over the next 5 years

Agreed - even with my limited understanding, I also thought inflation had not been taken into account

The prospective ILG ladder would indeed be for a 100k nominal withdrawal every year - which I understand does not take into account inflation so I assume in reality I would receive more at the time. This for a cost of @512k - deposit plus gilt purchase in line with the streamlit tool.

MK62

https://forums.moneysavingexpert.com/discussion/comment/81923684#Comment_81923684

Correct, assuming the first gilt in your ladder matures in a year's time...…so if inflation runs at 4% over the next year, your total "payout" (inc coupons) should be iro £104,000. In reality it should be slightly more though as you created your ladder using 0% as the cash interest rate, and it will very likely be higher than that (and c.20% of the total is kept as cash in your ladder).

Interestingly, for your ladder, if you set the cash interest rate above 3%, the tool will tell you to not to buy any IL gilts at all and keep it all as cash…😉

Veloflyer

The latter comment is indeed interesting - Bell would seem to offer me 2.4% interest for the cash in the SIPP 3.4% if in drawdown.

Clearly adding in the cash interest rate effectively lowers the cost of the ILG. More so if more £ are held as a deposit.

Factoring in the cash interest - assume 2.4% - would this make a difference to your 4.8% break-even rate?

michaels

https://forums.moneysavingexpert.com/discussion/comment/81922842#Comment_81922842

Slightly confused - if you are only looking for an inflation proof 37k each year then surely that is the amount that should be in your ladder and the rest should be invested appropriate to the timeframe when you wish to spend it?