ILG ladder query

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81924259#Comment_81924259

I could do that but I don't believe it is tax efficient. With 37k withdrawn each year from the SIPP, I'd obtain 9.25k TFLS and have to pay tax on the remainder - the crystallized amount - to obtain 37k net. in fact, I'd have to draw on more than the remainder to get to the 37k net required.

My way, I pay no tax for the 37k net.

MK62

https://forums.moneysavingexpert.com/discussion/comment/81923926#Comment_81923926

It would appear to lower the breakeven to around 4.4% (setting interest to 2.25% as 2.4% is not an option)……but the tool keeps £193k as cash (from a total investment of £503.6k)

There is a bit of a distortive effect here though - the tool expects you to actually withdraw (and presumably spend) an index linked £100k every year, but you would only actually be withdrawing an index linked £37k each year…….the remaining index linked £63k each year would stay in the pension and still earn a return, even if left as cash. Similar story with a conventional gilt ladder……..that would pay out £113729 each year, from which you would only be withdrawing an index linked £37k……

MK62

https://forums.moneysavingexpert.com/discussion/comment/81924259#Comment_81924259

That got me too tbh…….but the OP wants to use a Gilt ladder to provide both income (using TFLS and drawdown) and wealth preservation…..it's not been stated (yet) what will happen to the crystallised surplus moved into the drawdown pot each year……(ie crystallise £100k, withdraw £37k from that, leaving a surplus £63k in the drawdown pot)…….presumably this surplus will be invested each year according to the OP's overall plan.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/81923626#Comment_81923626

By default the lategenxer tool assumes a withdrawal one year from today unless you put a specific date in the 'start date' field. In my earlier calculations I'd forgotten to put today's date in the field (hence my 'nagging feeling'), so you are correct that the first withdrawal in my table should have had inflation applied (since it was taking place after a year). I agree if you do this that the breakeven inflation lies somewhere between 4% and 5%.

I redid the calculation with today's date in the start date field such that the first annual withdrawal takes place 'tomorrow', and the breakeven inflation is then very slightly higher at 5%.

While even 10% uncertainty between the two ladders might be considered high, it is small compared to investing in almost anything else - e.g., historically over rolling 5 year periods annualised real returns for cash varied from -11% (worst case), through 2.0% (median) to 8.3% (best case), while UK equities varied from -13.6% to 5.4% (median) to 20.6%.

One way to reduce the uncertainty, at the expense of extra complexity, is to construct both a nominal and an ILG ladder.

I also note that, at least in the 20th and 21st centuries, deflation in the UK has been rare, while inflation has been more unbounded. Furthermore, annualised inflation since the UK came off the gold standard (1932?) has been about 4.5% (in other words close enough to the breakeven point).

Finally, changing the cash interest rate makes very little difference to the payout rates and it is not clear whether the interest in the cash flow for the ILG case has been adjusted for inflation or not (which would require an internal assumption as to the inflation rate).

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81924316#Comment_81924316

As per previous post - it was for tax purposes. Were I to move 37k from the SIPP , I'd have 9.25K TFLS but have to pay tax on the crystallized 27.75k. In fact I'd need to move more than 37k to realize 37k net?

Does this make sense or am I missing something?

Moving 100k - or asking for 25k TFLS - plus asking for 12k from the crystallized would not incur tax and indeed generate a "surplus" of 63k crystallized. I have yet to decide what to do with it - possibly just leave it as cash with which to buy an annuity at the end of the 5 years.

MK62

It makes sense once it's understood exactly what you are trying to achieve tax wise.

As to the ladder, it's not quite the same as just comparing an IL gilt vs a conventional gilt………it's the IL ladder vs the conventional ladder and the former, at least as designed by the tool, leaves a significant part of the total uninvested (and hence not inflation protected).

In your shoes, I might be inclined to go for a conventional gilt ladder, escalating at c.6%pa, which after applying your drawdown plan would give

Gilt	Clean Price	Dirty Price	GRY	Quantity	Cost
TS27	99.75	99.84	4.01%	855.28	85392.90
TE28	100.50	100.61	4.11%	949.07	95482.75
TG29	90.51	90.57	4.02%	1052.55	95330.34
T30	100.50	100.61	4.24%	1126.69	113352.69
T31H	99.12	99.22	4.32%	1245.47	123576.42
Cash					0.00
Total					513135.10

End of Year	Ladder Output	TFLS	Drawdown	Total Withdrawal	Annual Increase
1	103640	25910	12570	38480	-
2	109797	27449	12570	40019	4.00%
3	116200	29050	12570	41620	4.00%
4	122860	30715	12570	43285	4.00%
5	129785	32446	12570	45016	4.00%

The above ladder would cost £513135……and would generate a £37k annual income (in today's money) escalating at 4%pa with no income tax to pay……you also have to factor in that your Personal Allowance will be frozen, so if you want to use all your PA but don't want to pay any tax, the annual inflation uplift to your actual withdrawal will have to come from your TFLS each year.

PS - the above was constructed by the tool with the cash interest rate set at 2.25%.

phlebas192

https://forums.moneysavingexpert.com/discussion/comment/81924277#Comment_81924277

I think you said you were with AJ Bell. They operate a virtual uncrystallised / crystallised system where the assets are kept in a single pot with percentages saying how much is allocated to uncrystallised & drawdown. As such if you want to take out £25k tax fee cash and £12k drawdown each year then you only need to generate £37k in cash per year. You still crystallise £100k to get the £25k tax free cash but you can leave £63k of it invested in gilts (or anything else).

michaels

https://forums.moneysavingexpert.com/discussion/comment/81924477#Comment_81924477

I may be wrong but I don't think you need the 100k available as cash to crystalise 100k.

So i still think you only need a ladder paying 37k in real terms and the rest invested for the timeframe when you plan to use it. It will still get crystalised the same.

So taking the 2 year point, your scheme is 100k in a 2 year ILG of which 37k is drawn down and 63k reninvested in a 3yr. Mine is 37k in a 2 year and 63k in a 5 year, both crystallised at the 2 year point.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81924541#Comment_81924541

Many thanks for your efforts here - much appreciated. Certainly worthy of consideration. To be clear, the 500K plus is all held in the cash account at present - I sold all the equities recently ready to invest in a gilt ladder. You are right that on maturity of each gilt each year, the 63K plus - the remainder of "ladder output" after total withdrawal - would be in cash? and not inflation protected. Not sure what to do with that at present.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81924573#Comment_81924573

Thank you for this - To be clear, I could alternatively set up a gilt ladder to generate 37K cash per year. For the sake of argument, let us say this costs 37 x 5 = 185k If I have 500k cash initially then could I also - for example - set up a gilt maturing in 5 years with the 315k remainder to ensure everything is protected for the 5 years?

Would Bell still crystallize the 100k each year - even if that crystallized portion is tied up in un-matured gilts?