Replace bond fund with Gilt Ladder

Pat38493

I'm thinking of selling my investment in VAGS Global Bond fund and creating a bond ladder with the same amount of investment.

Have other posters here successfully used the tool at this site to determine which ones to buy:

https://lategenxer.streamlit.app/Gilt_Ladder

It seems like I put in my parameters and then it tells me which ones to buy (the ones that are not greyed out)?

Reasoning is that I want to control the timing and be able to hold the bonds to maturity - I realised that bond funds like VAGS keep buying and selling bonds all the time to maintain the duration objective, which isn't what I really was looking for. (at least that's my understanding please correct me if I'm wrong).

I am more looking to lock in a nominal rate of return over about 8-10 years, and it looks like I can do this with a gilt ladder - e.g. according to AI, TG35 has an almost guaranteed nominal rate of return of 5.3% over nearly 10 years.

mrklaw

I’ve done exactly that. I have a 9 year gilt ladder bought in AJ Bell using that tool to tell me how much of each to buy. I think something like a 9 year ladder generating 10k a year from April 2029 cost me £66-67k earlier this year?

I’m also in the middle of a couple of specific individual gilts to top up the first two years of that ladder to cover until my DB kicks in at 60.

I did use google to help me understand things and took the first one slowly but it was pretty straightforward. These were nominal gilts - I need around 9k so I did a pretty simple uplift to ‘self inflate’ - although the tool does let you upload a csv file with individual yearly amounts if you want to have year by year increased values.

DRS1

I have used the tool (to play with) and have bought some gilts (though it would be generous to call what I have a ladder - its missing several rungs). I did not combine the two things partly because the tool seemed to have me buying some very small amounts of some things. Maybe that was just the way I input info into the tool.

Oh and if you haven't looked yet I suggest you sit down before you look at the cash flow page.

phlebas192

https://forums.moneysavingexpert.com/discussion/comment/82150437#Comment_82150437

If you ask it to produce a ladder with monthly withdrawals then it will come up with a larger number of smaller purchases because it is trying to optimise having the necessary cash available to withdraw each month. Tell it to use yearly withdrawals and it produces something more practical IMHO.

Roger175

I have just (this week) done exactly this for the same reasons as you outline.

I used the lategenxer.streamlit app which I found extremely helpful. I was initially a little confused by it, struggling to work out why it was recommending the various purchase values, but once I realised the income stream includes all the coupon values, it all made sense - once you look at the cashflow tab it all becomes obvious.

I have initially bought a £10k pa, 6 year ladder commencing Mar 28, which I have done in my AJB ISA and it was all pretty straightforward. I am now contemplating doing another ladder with a longer duration within my SIPP, since I'm holding a lot in STMM funds at present and feel the comfort offered by Gilts suits my requirements.

leosayer

I used that tool to create a nominal gilt ladder in my wife's SIPP. It worked well but here are a few considerations for you based on my experience having managed the ladder over the past couple of years:

Will it be held in a SIPP or ISA? If not then you need to consider which gilts you buy because some with higher coupon rates may leave you with higher income tax bill.

Depending on your cashflow profile (timing of maturities, coupons and drawdowns) you may be subject to your platform's low rates of interest on cash balances. You could sweep up surplus into a money market fund but this then becomes admin heavy, particularly if you have other holdings and inflows / outflows in the same wrapper.

Have you considered a fixed term annuity instead? It has the benefit of simplicity and it reduces your estate for inheritance tax. Of course, it's not reversible.

tigerspill

I have done something similar, but selling my multi-asset funds (e.g. VLS 40 and 20).

I have built a 10 year ILG ladder from 2031 to 2040. I plan to sell equities each year to add an additional year.

I now have the next 15 years generous spending covered by DB and SP pensions, savings and ILGs so virtually no risk.

poseidon1

https://forums.moneysavingexpert.com/discussion/6684689/replace-bond-fund-with-gilt-ladder

Just an observation, you are moving from a diversified global bond fund that had just over 4% exposure to UK bonds with a disproportionate weighting in favour of US bonds (40%).

I get your reasoning behind the move to a wholly 100% UK invested gilt bond ladder, but in terms of geographical spread and currency diversification, it seems a little odd given how little exposure you had to the UK originally.

mrklaw

I’d argue a gilt ladder doesn’t require diversity - its not a fund. You hold to maturity, you get back X as defined at time of purchase.

you can question the move from equities to fixed income, but unless you’re thinking your domestic government may default on gilts there should be no concern - likely it’ll be the safest thing in their portfolio (with the caveat of lower potential growth - traded for lower/zero volatility)

Pat38493

https://forums.moneysavingexpert.com/discussion/comment/82150612#Comment_82150612

It’s in a SIPP.

Yes I’m aware that I’ll need to use an MMF if I don’t want to get very low interest on cash balances, although this admin is in a sense optional - one other attraction of this approach is that if I was prepared to accept the platform interest rates for short term cash 1-2 years, it’s completely autopilot.

I considered an annuity but from getting quotes in the past, I suspect it would be slightly more expensive, but even worse, it’s an irrevocable decision. With a bond ladder, I at least have the option to sell some of the bonds if my circumstances changed dramatically (which I don’t expect).

I am probably looking at nominal gilts rather than index linked, because my SIPP strategy is to draw up to the 20% tax limit which seems to be fixed for the next 5 years (unless that changes again). Also it looks like Index linked bonds are not available on my platform without a telephone call (and therefore likely paying a telephone dealing charge).

Pat38493

https://forums.moneysavingexpert.com/discussion/comment/82150852#Comment_82150852

That’s understood that it’s a tradeoff - I am thinking it might be worth it for peace of mind until state pension age, because once we reach SP age, most of our money will come from fixed income sources anyway.

The trade off to me is - if the markets continue to grow at 20% or whatever for the next 5-10 years, I will lose out on the opportunity to increase my spending quite a bit in my most healthy years. However, we already do most of what we want to do and my wife already has some health issues which means we can’t really go jetting off around the world every 5 minutes anyway. Also - I think it’s unlikely that the markets will continue to have stellar growth for yet another 10 years given the last 15 years or so - of course I could be wrong, but if I do this I won’t need to find about it anymore for another 5-7 years.

Also - a pretty high % of my assets are tied up in a SIPP, so any big increase in spending would require paying 40% tax on withdrawals. Therefore I intend to rely on equities in my smaller ISA pots to see how they perform on the next 10 years.

Also open to challenge on this, but my thinking is that since I live in the UK, if the UK government is defaulting on its debts I will have bigger problems than just having a reduced bond redemption values.