Annuity vs Gilt ladder

MarkCarnage

If you buy an annuity, the provider basically just buys a gilt ladder themselves to run for your predicted average lifespan.

Not quite true….in practice they use synthetic (derivative) exposure for most of this and most of the supporting portfolio is invested in non government credit assets with matching cashflows to the expected aggregate payments they make to pensioners. They get a yield pick up from this over and above gilts.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82197056#Comment_82197056

If you can tell me when my funeral will be, I'll be able to make a more informed choice…..

Lowtrawler

I have been through a similar thought process to @Veloflyer

I started by deciding on a full-term index linked gilt ladder running from my expected retirement date to age 90. The cost of putting this ladder together was similar to the cost of purchasing an index linked annuity. I estimated my remaining funds could be long-term invested and, if necessary, I could use those to purchase an annuity to cover my days beyond 90 nearer that time.

Since then, my plan has changed. I decided to place half my SIPP into an annuity. Together with the state pension and my index linked final salary pensions, this will provide the annual income I expect to need for the rest of my life. The remaining funds, together with my savings, will bridge the gap to my normal retirement age, meet expected one-off costs such as car purchases / house maintenance and leave me with a healthy surplus to meet any unexpected events.

My decision was based on not wanting to worry about mortality risk and when / if to take out the post 90 annuity.. IMV, unless you have sufficient funds to purchase a later life annuity beyond the initial gilt ladder, only an annuity should be considered. If you have sufficient funds for the later life annuity, it becomes a personal choice with no right or wrong answer.

MK62

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

Just goes to show that it's all very dependant on circumstances……..by way of comparison, a 30yr index linked gilt ladder currently gives a 4.5% payout………a joint life 100% index linked annuity with a 30yr guarantee currently gives a 4.1% payout for a 65/60 couple with no health issues (source: moneyhelper website).

So its a trade off…….for such a couple, lower income for 30yrs to cover the possibility of at least one partner living longer than that, or accept that risk and take the higher income. Unfortunately, there's no way to know, today, which would be the better option….in the end it's a judgement call (or a coin toss).

PS…..why a joint life 100% annuity?…….in terms of household income the survivor would already be losing one state pension and one personal allowance, so if you accept that the survivor would need iro 75% of the former net total to maintain the same living standard, then they may well not be able to accept any drop in income from the annuity…….but as stated at the outset, it's all very dependant on individual circumstances (and for comparison, a gilt ladder's payout is unaffected by the demise of either partner…or both)

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/82197846#Comment_82197846

I agree that the comparison may be tighter with joint, 100% beneficiary annuities. I note that in the example you've given (65/60) the outcome also depends on the sex of the 65 and 60. For example, assuming a male at 65yo and female at 60yo, the probability of both being dead after 30 years is roughly 45%* - in other words, there is a roughly 55% chance that one or both will still be alive after 30 years. For a 65yo female and 60yo male, the chance of one or both being alive falls to just under 50%. For M/M and F/F couples the chances are again different but close enough to 50%. FWIW, if I was constructing a ladder for a lifetime income, I'd choose the length based on the youngest person getting to 100yo (even then a 60yo female has a 7% chance of outliving the ladder).

* (1-15/100)*(1-46/100) where 15% and 46% are the probability of male (65) and female (60) living for 30 years (reading rough values off the ONS life expectancy chart)

Triumph13

The 100% joint life to protect the surviving spouse is eminently reasonable. The 30 year guarantee seems a little excessive / unusual. It would be at bit strange to want to provide an inheritance only in the event of you both dying early. I thought 30 year guarantees were more for people in their 80s wanting to dodge IHT.

MK62

The 30yr guarantee is really for comparison, as essentially that's what a gilt ladder gives you (ie it will payout for 30yrs regardless of whether one, both or neither have expired)……..as for legacy from a DC pension, it's perhaps a secondary consideration, but still a consideration…….the pensions are to provide us with retirement income, but in the event that we did both expire before the end of the 30yr period, we'd much prefer our beneficiaries to have whatever's left, rather than an insurance company.

On the subject of lifespan probabilities…….it seems to depend on which data you read. The latest National Life Tables https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/datasets/nationallifetablesenglandreferencetables

suggest that the average number of years that a 65yo male can expect is just under 19, while for a 60yo female, it's just under 26.

If you want total certainty that your income will continue should you or your partner outlive the 30 years, then only the annuity can provide that certainty.

PS - the index linked gilt ladder payout matches the annuity (4.1%) at about 34 years…….but there's arguably little point then in going the gilt ladder route if it doesn't offer anything above the equivalent annuity.

leosayer

Annuities act as insurance against a massive leap in life expectancy. Maybe AI will help scientists deliver a wonder drug.

I appreciate that equities offer some indirect protection for this eventuality but I'd feel much more comfortable having guaranteed inflation-linked income for life. What would happen to the state pension under such a scenario?

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/82198094#Comment_82198094

On a technical note (that will be of little interest to most), the lifetables you've linked are period tables (in other words they look at mortality stats within a given period), whereas the values in the ONS life expectancy calculator are cohort values, i.e., the projected mortality for those born in a given year. My understanding is that cohort stats are usually used in pricing annuities (but not the ONS ones) since life expectancy over the 20th century has generally increased (whether that will be true for the 21st remains to be seen).

IMV, where ladders come into their own is covering limited periods (e.g., a bridge from retirement to pension), where you want to customise the income stream (e.g., you could build an inflation-linked ladder with inflation+1, i.e., backloading income, or inflation-1, i.e., front loading income, etc.), to reduce sequence-of-return risk, or where you are really, really averse to handing over the money to an insurance company.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82198094#Comment_82198094

What's the point of using average life expectancy? If you use averages you may as well invest 100% in equities as on average they'll perform better than gilts.

You use gilts rather than equities for safety not average performance, and in the same way using an annuity instead of a gilts ladder is for safety.

If you really want to use a gilts ladder instead of an annuity then you need to define how "safe" you want it to be, similar to SWRs for drawdown, eg a 10% chance of "failure" (ie outliving the ladder). Then what you need isn't average life expectancy, it's the age at which 90% of your cohort will die by.