Replace bond fund with Gilt Ladder

mrklaw

I looked at the MMF vs leaving in cash and its only a relatively small issue IMO

for me first maturity is Feb 2029. so I’ll have a couple of years of coupons landing as cash into my AJ Bell account. Maybe I’ll pop those in an MMF until Jan 2029 then move them to cash

But after that initial build up phase, each rung matures 12 months later - not sure its worth putting maybe 1 coupon payment into an MMF for 6-9 months? the second coupon is on or near maturity so not worth it, and obviously the maturing gilt is likely then spent or immediately reinvested. AJ Bell also pays I think 2 or 2.5% on cash balances so not great but not the end of the world

Note : AJ Bell requires cash in drawdown if you want to set up a regular monthly FAD (which I probably do) - so for me I’ll likely just take the maturity in February and the previous 12 months coupons (which should equal the 10k defined) and crystallise it in Feb/March ready to start drawdown after April 6.

theblueflash

Those of you looking at this, are you looking at your “spend” being effectively coupon payments and any capital gain as each rung matures - but effectively preserving your capital “intact” ?

Roger175

https://forums.moneysavingexpert.com/discussion/comment/82151334#Comment_82151334

As somebody who has done this (ie buy a gilt ladder) allow me to respond - I'm not entirely sure what you mean by 'spend', but in my case I am simply looking at the total return of the gilt (both that from the coupon and the capital increase at maturity) and comparing it to other safe cash-like deposits. In our case, as an early retired couple, we have almost certainly enough of a pot to see us comfortably to the end of our days. What we don't want to risk is a market crash and having to rebuild that pot all over again. We simply look to keep ahead of inflation and avoid too much stress.

Therefore we have de-risked and now only hold about 45% equities and the rest in various forms of cash-like deposits. This is a variety of fixed rate savings, both inside and outside of ISA's as well as STMM funds and now a gilt ladder.

A reasonably large proportion of our equities are in a large basket of individual company shares, those chosen for high yield (dividends), therefore I am used to receiving a lot of cash from dividends, which I reinvest as and when, or move into STMM funds depending on how I'm reading the mode. I will treat the coupons from the Gilts in exactly the same way as I treat dividends from shares.

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82151334#Comment_82151334

for me - I want 10k per year for 9 years - starting in 3 years

so year one is (three years of 9 different coupons twice a year - 54 coupons?) + the first gilt maturing.

Year two is then only one years worth of coupons from 8 remaining gilts - so 16 coupons + maturing gilt

and so on. Each subsequent year is therefor more gilt and less coupon. The online tools work all that out for you to be the least overall cost for the income needs

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82151334#Comment_82151334

You can get gilt ladders which are revolving - ie where you don't spend the money when the gilt matures you just reinvest in another gilt to extend the ladder a year further. That would be an instance of effectively preserving your capital.

Other people have what is called a collapsing gilt ladder where you spend the entire maturity proceeds (plus the coupons) each year and don't preserve any capital. It has all been spent.

It does rather depend what your objective is.

I think it would be unusual to just spend the coupons (and the capital gain) and reinvest the original capital. For one thing that would mean tying up an awful lot of capital in gilts. I suppose if you wanted to live off the coupons you could buy a long dated high coupon gilt (you'd want to hold that in an ISA) rather than a gilt ladder. Some seem to have a gross yield of 6% (though that includes the capital gain I think).

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82150883#Comment_82150883

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).

Just on the charges point for most platforms I think you will find that if you can't deal online and have to phone they will give you the online dealing charge. I know HL do that. Best to ask before you place the order of course.

NoMore

https://forums.moneysavingexpert.com/discussion/comment/82151617#Comment_82151617

II are the same, online dealing charge even though you need to phone for linkers

Pat38493

https://forums.moneysavingexpert.com/discussion/comment/82151334#Comment_82151334

As others answered - in my case no - the redemption values of each gilt will be spent as part of the ongoing ladder, so after approx 9 years, all the money will be spent, which is the intention - to remove all (almost) risk from the first 9 years. Chances are, this won't give me the absolute best long term outcome, but it will be good enough and will avoid having to stress about it.

Pat38493

https://forums.moneysavingexpert.com/discussion/comment/82151648#Comment_82151648

Thanks yes - I actually messaged them today as I seemed to recall someone posting this in the past - it seems like you only pay the telephone dealing fee if you don't like trading online and you insist on doing it by phone when it can be done online.

They ignored my other question which was - why can't i buy index linked gilts online, when you can do that with other providers e.g. AJ Bell from what I remember?

In my case I probably won't use index linked gilts anyway for the reasons described above i.e. my withdrawals are somewhat capped by the 40% tax threshold unless I decide to splash out, which would come from higher than expected equity returns anyway.

Pat38493

https://forums.moneysavingexpert.com/discussion/comment/82151414#Comment_82151414

By the way, I closed the loop and got an annuity quote after watching the James Shack video today that talked about annuity prices being sometimes better than a bond ladder due to risk pooling. However this didn't seem to apply to me - probably I'm too young for there to be enough risk to pool to make the annuity cheaper.

I also mocked up this scenario in Timline to test the historical scenarios versus my current strategy - I basically threw out all the first 9 years from the Timeline plan and forced the opening balances to roughly match what my equity position would be after implementing this strategy.

The numbers look good - in fact the outcome is better than my current strategy giving 100% success rate instead of 98%. Of course I lost some upside above the median scenarios but that seems worthwhile in order to make the plan much more hands off and less stressful.