When to switch a Gilt ladder from nominal to index-linked?

RogerPensionGuy

This thread content is very much in my mind currently as I'm moderately concerned inflation may tweek up and stay elevated for a few years and with so much debts around, maybe this is a plan for some people.

I have just purchased an RPI annuity and am happy with its output for me personally, no health enhancement, for info this RPI annuity payment in 1st year was the same as if I picked a fixed 3.8%. I was temped to pick the 3.8% fixed, but feeling inflation may go hot I opted for the RPI. My DB pension is LPI to 5% and I wanted harder protection for information.

Below is a nice youtube output with a guy who has good knowledge of the mechanics these last 60odd years, a very relaxing output to watch and certainly informative.

Cheers Roger.

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https://youtu.be/7iYnIjcu9l8?is=GY8ycrH9qcdxcGTi

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Just another link below that is interesting that I thought tp put on this post.

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https://youtu.be/MZxmfduds44?si=8llDd960fkdEBzFn

Storcko14

https://forums.moneysavingexpert.com/discussion/comment/82044478#Comment_82044478

That's the nub of it. I agree there's little to be gained by trying to predict future inflation but equally one shouldn't be blind to what could happen and endure for long enough to derail a fair few retirement plans. It's worth being alert to a number of possible futures and having a notion of how best to react - scenario planning.

michaels

If you are happy with a degree of risk then why not go with equities rather than nominal gilts, the average return will likely be higher.

The Ukraine /post covid inflation 'blip' demonstrated that real spending power of nominal assets can take an appreciable hit just in a year or two. Burnham is talking the talk of 1970s style Labour - tax, borrow and spend….

JamTomorrow

Some great discussion points and insights here, thanks everyone.

I'm coming to the conclusion that I am entirely happy to pay a premium for linkers over nominals to structurally mitigate the bulk of my inflation risk. Having spent decades in the accumulation phase, I’m now in a strong position where I don't need to chase marginal returns. Why take the uncompensated risk when a specific product exists to eliminate it?

Looking out over the next 10 to 20 years, the macro picture and inflation paths seem highly uncertain. Switching the later rungs of the ladder to index-linked units means I can treat inflation as one less variable to worry about from a retirement planning perspective.

Some potential scenarios im considering from working with AI when making my decision :

3 Bullish Inflation Scenarios (Structural High Inflation)

Scenario 1: Sovereign Debt Devaluation & Financial Repression

• The Logic: With UK public sector net debt hovering near 95% of GDP and structural spending pressures rising (healthcare, pensions, net-zero infrastructure), the state faces an unsustainable interest burden.
• The Outcome: The Bank of England and HM Treasury cooperate in implicit "financial repression." Rather than executing painful spending cuts or politically impossible tax hikes, the state allows inflation to run warm (e.g., 4% to 5%) while capping bond yields below the inflation rate. This subtly inflates away the real value of the state's nominal debt over a decade, using fiscal drag to capture private wealth.

Scenario 2: De-globalisation, Fractured Supply Chains, and Greenflation

• The Logic: The multi-decade "China deflation shock" (cheap globalized labor) has ended. The next 20 years are defined by near-shoring, friend-shoring, and parallel supply chains due to geopolitical friction. Concurrently, the capital expenditure required to transition away from fossil fuels creates chronic, structural demand for raw commodities.
• The Outcome: The UK, as a net importer of goods and energy, faces structural supply-side inflation. Even if AI automates services, the physical costs of food, materials, energy, and localized manufacturing rise continuously, keeping CPI structurally high.

Scenario 3: AI Fails to Fix the Aging Labor Cost Bottleneck

• The Logic: While AI drastically improves efficiency in digital and white-collar sectors (finance, software, legal), it cannot easily automate physical, human-centric, localized services. The UK has a rapidly aging population requiring immense physical resources in health and social care.
• The Outcome: A structural labor shortage in physical services creates an extreme wage-push spiral in the non-automatable parts of the economy. Because people still spend heavily on healthcare, leisure, and local services, the economy suffers from a version of "Baumol’s cost disease," where the cost of physical services rises drastically, keeping core inflation high despite tech progress elsewhere.

3 Bearish Inflation Scenarios (Structural Low Inflation/Deflation)

Scenario 1: The AI "Zero Marginal Cost" Supply Shock

• The Logic: Advanced AI integration reaches maturity across the global and UK corporate sectors, fundamentally breaking the link between output and human labor hours. The marginal cost of data processing, administration, compliance, software development, creative output, and customer interaction drops toward zero.
• The Outcome: A massive, systemic supply-side shock. As corporate operational expenditures crash, competition forces companies to pass these massive savings onto consumers. We enter a multi-decade era of structural tech-driven deflation, similar to the computing power deflation of the 1990s and 2000s, but expanded across the entire services economy.

Scenario 2: Secular Stagnation & Balance Sheet Deflation (The Japan Outcome)

• The Logic: High public debt levels ultimately act as a structural chokehold on economic growth. When government debt service crowds out private sector investment and tax burdens reach post-war highs, aggregate demand stagnates permanently.
• The Outcome: The UK slides into a classic "liquidity trap" or balance sheet deflation. Consumers, burdened by high taxation and a lack of real economic growth, reduce discretionary velocity of money. Even if the government prints money or runs deficits, it fails to generate velocity or aggregate demand in the real economy, keeping inflation pinned near 0% to 1%.

Scenario 3: Global Demographics & Asset Decumulation Dust-Settle

• The Logic: The UK and its major trading partners pass peak demographic aging. As the massive Baby Boomer generation progresses deep into retirement, their consumption profile shifts from buying goods/property to decumulating assets and drawing down savings.
• The Outcome: Aggregate global and domestic demand shrinks structurally. A shrinking, older population simply buys fewer houses, cars, and consumer goods. This structural deficit of buyers creates a long-term deflationary drag that monetary policy cannot easily fix, overwhelming supply-side pressures.

leosayer

There are any number of economic scenarios that could end up favouring one type of asset over another in the future. Some foreseeable some not.

The same also applies to your life.

Do you have any exposure to equities?

JamTomorrow

https://forums.moneysavingexpert.com/discussion/comment/82045759#Comment_82045759

I've got a 3 bucket stratetgy in place :

Bucket 1 - 12 month cash/money market (currently empty until closer to work optional / retirement)

Bucket 2 - 10 year GILT ladder - currently have 8 years purchased through to 2037. Currently all in nominals, but this is the purpose of this thread as I am going to change some of those nominals, 5 years from 2033, to linkers. Expect to replenish the bucket with linkers if conditions are right (I need to establish some guiding principles / guardrails around this. Bucket 2 is approx 35% of assets and will increase a few points when I switch to linkers

Bucket 3 - Equity engine in 3 ETFs - would typically be one (VWRP) but I have tilted away from the US by spreading a third in each of XUSE and VHYG. Bucket 3 around 65%.

leosayer

Expect to replenish the bucket with linkers if conditions are right (I need to establish some guiding principles / guardrails around this.

Good luck with this - I found it impossible to come up with a bucket replenishment strategy that I was comfortable with so settled on a 75/25 portfolio with the 25% made up of cash/MM and a short-term gilt fund. This is supplemented with my wife's 7 year nominal gilt ladder which provides about a third of our basic income needs.

I find the bucket approach superficially attractive but I felt that I was in a danger of changing my own principles whenever my mood changed and I'd have ended up trying to predict the future which I want to avoid.

Now I have a simple rule - if I drift too far away from 75/25 either due to markets or drawdowns then I rebalance.

In answer to your original question, why not go for a split of linked and nominal gilts for each year?

Dead_keen

There's no right answer to any of this stuff. There is a danger of focusing too much on precise numbers - e.g. to get the tax exactly right it's not £50,000 that I want but £50,270 less whatever other income that I have which is not tax exempt, and as increased by gift aid payments (but I then have to worry about how the state pension indexes over the years vs the increase in the higher rate threshold done at the whim of the government).

For me, thinking about gilt ladders works better with an engineering perspective - if I want a 50,000 ohm resistor, the two nearest are 47,000 and 56,000 and either will work fine.

I can't forecast what next month's expenditure will be with any accuracy and so how on earth am I going to forecast what I am going to spend in ten years? But I am lucky enough to be in a position where I don't have to worry about every £1 I spend.

I have created a gilt ladder to ensure that my SIPP pays a monthly amount if I forget to do something (or get incapacitated) as HL does not sell assets to cover regular drawdown. My gilt ladder will ensure that I have enough cash to drawdown for exactly ten years (it's a bit random that it's exactly ten years but I have just asked my favourite LLM to tell me when I run out and that's what it said). I've done the gilt ladder with normal gilts. And I've used an engineering approach where if I get inflation a bit wrong then I won't starve (I'll just sell some equities).

In a few years time I will probably extend my ladder a bit. Then I'll take a view as to whether I want an "engineering" nominal amount or a precise index linked amount. Either way, I am lucky enough not to have to worry about being too precise. But if I was to start to worry about that, I'd by an inflation-linked annuity.

kempiejon

@JamTomorrow I found this interesting.

Bucket 3 - Equity engine in 3 ETFs - would typically be one (VWRP) but I have tilted away from the US by spreading a third in each of XUSE and VHYG. Bucket 3 around 65%.

I bought a VWRP-alike using regional ETFs, europe xUK, Asia, Japan, Emerging, USA in similar weightings to the global etf. I recently sold half my VUSA - a pure S&P500 play and swapped for VHYL. Not very scientific, VUSA had more than doubled and the tech/AI exposure gave me cause to think about my diversity.

A bigger review and check of my weightings and asset spread might mean I do a more thoughtful rebalance eventually.