Annuity vs Gilt ladder

Triumph13

If you buy an annuity, the provider basically just buys a gilt ladder themselves to run for your predicted average lifespan. If you DIY the gilt ladder, you don't have to live for much more than that average to eat up what you saved by not paying the provider their overheads and profit margin. The longer you live then, the worse a decision the gilt ladder was.

Personally, I would go for the annuity rather than be worrying about the risk of outliving the gilt ladder. I would also, most definitely, go for an indexed linked annuity, because the value of a flat one could very easily be halved by inflation over the timescales concerned.

OTOH, I might not buy an annuity to cover ALL my core needs. I personally see my baseline as being my guaranteed income PLUS a typical drawdown percentage on my equities (I use 3.5% of portfolio value) AFTER values have crashed by 50%.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82196276#Comment_82196276

You can buy IL gilts maturing up to 2073, although from 2056 they currently only have maturities at around about 3 year intervals so the ladder would be a bit lumpy from then.

Veloflyer

Folks

All of the above is very useful. Many thanks. A little more info perhaps. I am 61, still unsure whether to return to work or not, but for the sake of simplicity (and my sanity) let's assume I'm not. The part of the pot set aside for day to day expenses is currently held in a short ILG ladder, maturing every year as a bridge until I receive SP at 67.

Some points perhaps

I get the life expectancy thing. My simple understanding of an annuity is the longer you live then an annuity becomes increasingly attractive. However, my main concern is I don't care much for the irreversible nature of an annuity. I do like the ability of a ladder to get my money at any time, the control it offers, and it if the current ladder is anything to go by, seems fairly simple to set up.

That said, I had not appreciated the potential loss of marbles in later life, nor fully appreciated the ongoing DIY maintenance that a ladder requires. I think the annuity scores here.

I am indeed leaning towards an inflation linked annuity/ladder.

I suppose it also depends on what the annuity rates will be in 6 or so years' time when the decision will be made which way to jump.

QrizB

I suppose it also depends on what the annuity rates will be in 6 or so years' time when the decision will be made which way to jump.

If you're 61 and thinking of retiring now, why would you wait 6 years to take an annuity?

My current plan is to set things up in the first year of retirement such that once my SP comes in at SPA, my income needs no manual intervention. So I'll be kicking off an annuity (and drawing my DB) at eg. 60 at a level that means I only need to draw down ~£13k pa from my remaining DC as "state pension replacement" for seven years, after which (SP plus annuity plus DB) will just roll on until I die.

(The DB and annuity will have survivors benefit such that Mrs QrizB won't need to do anything if she outlives me.)

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82196515#Comment_82196515

Why wait? - No particular reason, save I decided on an ILG ladder as a bridge to SP rather than an annuity. I also may still return to work, so didn't want to splurge megabucks on an annuity until certain that I was sane and did not wish to return - an annuity being irreversible. At the time, I didn't believe there was much in it between annuity or ladder - and I still don't - but ladder was just a fairly simple way of preserving worth and keeping control for that bridge period. That said, I have yet to drawdown from it, but the methodology for that also "seems" fairly straightforward - held in a SIPP with Bell.

RogerPensionGuy

If a person is 61 years old with a SIPP and wants to lock in hardwired income for all the good reasons and feels the current annuity rates feel like it works, maybe an annuity now would fit the needs.

Reference managing cash flows in the next few years, maybe any annuity income can allow more SIPP filling via paid employment or even inputting 3.6K PA from cash or savings.

I certainly like pension freedoms and annuity products, they both work and have goods & bads.

I was very reluctant of buying an annuity a few years back, but the annuity rates now feel okay to me and annuities certainly well cover living long and no thinking, inputs or tinkering.

Cheers Roger.

OldScientist

Just to put some numbers to this

A single life, level annuity with 5 year guarantee currently has a payout rate of 7.5% at 61yo and 8.4% at 67yo (see https://www.hl.co.uk/retirement/annuities/best-buy-rates ).

Assuming income is required until age 96yo (roughly a 10% or 20% chance of living longer for a male or female, respectively) then a nominal gilt ladder (see https://lategenxer.streamlit.app/Gilt_Ladder) currently has payout rates of 6.1% at 61yo (35 year ladder) and 6.5% at 67yo (29 year ladder).

On this basis, the annuity provides between 20% and 30% more income than the ladder (or requires 20% to 30% less premium to buy the same income).

The annuity will (absent insurance company and FSCS failure) provide a life time income. There is a 10-20% chance that the retiree will outlive the ladder or will have to accept lower income for a longer ladder (to 100yo, 5.9% or 6.2% at 61yo and 67yo).

The annuity is simple in operation (except, I assume, like pensions, insurance companies will occasionally send a 'are you still alive?' letter). A look at the 'cashflow' tab on lategenexer's ladder tool shows that income is 'lumpy' and needs organising into a cash buffer to provide monthly income (to be fair, this is likely to be less complex than drawdown from a risk portfolio).

In the event of early death there will potentially be more legacy with the ladder than the annuity. Why potentially? The annuity provides more income so more income will be required from elsewhere to match it, in other words, the drawdown pot will be smaller. Alternatively, if the income is matched, then the drawdown pot will start larger. However, death immediately after the expiry of a 5 year guarantee period is likely to leave a larger legacy with the ladder than the annuity (I note that a longer guarantee period can be purchased at the expense of lower payout rates).

For the annuity or ladder at 67yo case, the ladder has the advantage that current rates can be locked in by building a deferred ladder (e.g., deferring a 31 year ladder to 67yo, the payout rate is 8.8% - although one could equally put aside the premium for the annuity with much less certainty as to the income it will buy in 6 years time).

Comparisons could also be done with inflation protected income streams.

dunstonh

Putting aside commercial terms, annuities benefit from mortality gain. Gilt ladders do not.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82196770#Comment_82196770

Many thanks, this clarifies matters - I wasn't certain of the numbers or how to apply them, hence me stressing fag-packet. This and reading up more, I think I am leaning to some sort of index-linked annuity.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82196907#Comment_82196907

This is key - with an annuity those who die early pay for those who die later. If you dont choose an annuity you need to have some other strategy if you wish to guarantee you can continue the standard of living to which you have become accustomed into extreme old age.

The downside is complete loss of flexibility. Your choice, your funeral (so to speak).