Annuity vs Gilt ladder

Veloflyer

Looking for a low risk methodology to fundamentally preserve the wealth of part of my as yet uncrystallized pot in retirement and thus not be at the mercy of any market crash. The monies from this would be used to provide for day to day expenses during retirement. The other part would be invested in equities, and used for all other expenditure. The thinking being if there is a substantial and long lasting market crash, we'd be reasonably OK and not have to drawdown from the equity pot in a downturn.

Equities are therefore out, so the thinking is annuity or gilt ladder. Fag packet investigations using (lifetime) annuity rate of 7% and the Streamlit tool seem to show that the costs of each are roughly the same. I used 20K/ann withdrawal for 25 years (optimistically perhaps replicating life from 67 when I may take it out). Streamlit with conventional gilts at 2% cash interest shows 275K cost. A 275K pot @ 7% may also get me an annuity of around 20K/ann. I fully realize both are approximations.

Assuming then that each method costs similar - and I'd be happy to stand corrected on that one - I am struggling a little as to why one would choose an annuity over the far more flexible gilt ladder. I fully appreciate I may also be missing something blindingly obvious….

eskbanker

Surely an annuity delivers certainty of future income, at the point of buying it (albeit subject to inflation), whereas a gilt ladder will be more variable?

Annuities would be simpler to set up, as a one-off transaction, for those who aren't inclined to manage a gilt ladder on an ongoing basis?

mrklaw

a gilt ladder held to maturity offers similar certainty.

For me it came down to timing. I’m not due to retire for 2.5 years and I can’t buy an annuity to start in 2.5 years. So do I derisk into MMF or similar and hold for 2.5 years, hoping annuity rates stay strong (long term gilt yields seem high so maybe not a big risk of a drop)?

or buy a gilt ladder now to start maturing in 2.5 years and lock it in with certainty in advance?

I did the latter. I’m just waiting for one more workplace pension payment in november, will transfer that out to buy the last half of the last rung and thats my bridge sorted.

eskbanker

a gilt ladder held to maturity offers similar certainty

But the point was really that such maturity is finite at any given point in time, i.e. requiring further later purchases at unknown returns, whereas a typical lifelong annuity continues until the death of the holder.

LHW99

And as you get older. the annuity keeps paying without you having to worry about loss of marbles.

kempiejon

A while back I tried a few scenarios of index linked annuities and a collapsing IL gilt ladder. I remember up to 23 years fairly similar upfront costs. As I might get lucky and have more than 30 years I see annuities useful to cover longevity risk. 10 years into an IL ladder one could change their mind.

With convention gilts and level annuities with the possibility of three or even four decades timescale I'm too feart of inflationary pressure.

Marble ownership contingency I don't really account for, though I've read numbers from 1 in 10 to a third of deaths amongst olders are with some form of dementia, perhaps I should.

MK62

The big differences for couples, are

1 - a gilt ladder offers both members full access to 100% of the remaining payouts whereas only a joint life 100% spousal income annuity offers that

2 - a gilt ladder has a fixed term whereas a lifetime annuity guarantees income for life.

3 - with a gilt ladder you retain the flexibility to change course if necessary or desired, but an annuity is an irreversible decision.

There's no right or wrong as to which is best (without hindsight), you just have to decide which set of pros and cons suits your outlook better.

tigerspill

https://forums.moneysavingexpert.com/discussion/comment/82196131#Comment_82196131

I am assuming VF is referring to Index Linked Gilts which provide certainty (as much as is possible) in real terms.

For us, we went with a Gilt ladder with nominal gilts for a few years the ILGs from 2031 onwards.

The reasons being -

1. Flexibility - I am not "locked" into anything. While I plan to hold to maturity - I can still get at my money if I want at any time.
2. To me, as a couple, it just seemed to be a better and simpler option to lock in true value.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/82196260#Comment_82196260

Sure, but, as above, the point was more about duration, i.e. the decision about the endpoint of the gilt ladder.

zagfles

https://forums.moneysavingexpert.com/discussion/6689890/annuity-vs-gilt-ladder

The "blindingly obvious" thing is the annuity would keep paying if you live to over 92! Which is approx a 25% chance for a 67 year old man, or about 30% for a woman. I play bridge in a club which has several players in their mid-late 90's who are still living a good life, all there mentally, most have some mobility issues but otherwise are fine and enjoying life. So don't write off your (potential) 90's!

Also I assume you're talking about index linked gilts/annuity, the 7% figure seems to be in between. Obviously a flat annuity or gilt ladder won't provide you the safety of covering day to day expenses in retirement over 25+ years.

mrklaw

how far out can you buy gilts - 20/25 years? thats almost an entire planning cycle for a normal retirement.

I would perhaps think a simpler comparison and where they’re closest is a fixe term annuity. somethign used for a bridge to state pension for example. Lock in a known return (either nominal or index linked), guaranteed income known at the outset for a specific sum of money.

Then at the end of the bridge maybe you choose to buy a lifetime annuity to cover the basics on top of state pension, or just let state pension cover the basic and you have your equities to flex on top.