Annuity vs Gilt ladder

MK62

Out of interest, I just ran the same numbers as above apart from changing the female partners age to also be 65 (again, no health conditions, joint 100%, 30 yr guarantee), to see the effect that had……

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82198957#Comment_82198957

OMG you really don't get it.

Instead of the plane ticket, why don't you offer your potential beneficiaries a choice, either you buy a gilts ladder and they get to keep what's left when you die, but if you outlast it they have to pay you annually what the ladder was paying. Or you buy an annuity and they just get your house.

If they choose the former, just be careful of funny tasting tea when you go round to visit.

FIREDreamer

https://forums.moneysavingexpert.com/discussion/comment/82199108#Comment_82199108

… and avoid the mushrooms!

MK62

You might offer your beneficiaries that choice…….but I think I'll keep my powder dry thank you!

I think it's you who simply doesn't get it……..there is a choice if you want a guaranteed income, it's not just an annuity. Yes, the annuity offers that income for life……however long or short…..nobody is disputing that……but it comes at the cost of zero legacy. You can mitigate that (at least to gilt ladder equivalence) using an annuity guarantee (or, to a certain extent, value protection), but that restoration of legacy to an annuity does not come for free, no matter how much you think it might.

If legacy is of no concern, then a 65yo couple might take the slightly reduced income from an annuity (vs a gilt ladder) in exchange for the annuity's insurance against living beyond 95……if legacy is a concern though, and an annuity is the choice (ie they want the longevity insurance), then they'd have to a take the annuity guarantee and the further reduction in annuity income. EDIT - the reduced income is for a 65/60 couple….the 65/65 couple would see an increased income (relative to a ladder) with no guarantee, but a reduced income with.

That said, it doesn't have to be a this or that choice……you are free to mix and match to suit your circumstances…..perhaps half in a non-guaranteed annuity and half in a gilt ladder……or half in a guaranteed annuity and half in a non-guaranteed annuity……or any mix you like…..if that suits your circumstances better (legacy doesn't have to be all or nothing either)

I've already accepted that for a single 65yo with no legacy concerns, then an annuity will offer a higher income than a 30yr gilt ladder (and gives the longevity insurance), as OldScientist illustrated earlier in the thread…..for a couple though, that simply isn't true (unless perhaps, you bring certain pre-existing health conditions into the equation). And yes, if you went fully down the gilt ladder route, you'd have to accept the risk of living beyond the end of said gilt ladder…..but as I've already stated - if a couple want total certainty (at least as far as that's possible) of income no matter how long they might live, then only an annuity can give them that…..even if it means a reduced income earlier in retirement.

MarkCarnage

Essentially, the illustrations above show that an IL 30 year gilt ladder pays out about 5-8% more p.a. than an annuity with a guarantee of similar term. The longevity guarantee at the back end will be worth that for many, plus the skill set and costs of setting a gilt ladder up must be taken into account.
Insurers have to make a return on capital yes. However, they tend to fund the annuity book from a portfolio set up to yield gilts + 50-100bps by holding matching credit assets with that kind of yield premium over gilts. They use derivatives to get the duration and inflation protection on the whole and don't hold a lot of physical gilts/IL gilts now.
Gilt ladders may have a valuable place for some, notably as a secure bridging income until other pensions kick in, but to compare the payouts directly with annuities is a bit misleading.

Triumph13

I presume you also refuse to insure your house, because it probably won't burn down, so you're just lining other people's pockets?

Using a gilt ladder for a whole retirement gives you a step function in income that risks leaving you in a cardboard box in your old age. For your heirs it's a downward slope, with inheritance reducing for every year you live - and probably going into negative territory if they don't want you on the streets when it runs out.

If you want guaranteed income, and I'd suggest you do at least for your bread and butter, then annuity is the way to go. If you want to leave a legacy, the sustainable drawdown from an equity portfolio.

MarkCarnage

https://forums.moneysavingexpert.com/discussion/comment/82199547#Comment_82199547

Assuming this wasn't in response to me (as I am broadly agreeing with you)? :)

Triumph13

https://forums.moneysavingexpert.com/discussion/comment/82199636#Comment_82199636

No, we posted simultaneously and you just got in ahead of me :)

In a perfect world, you'd be able to buy deferred annuities that only kicked in at age 95 or whatever, and would presumably then be relatively cheap. It would then be interesting to see whether gilt ladder plus deferred annuity beats straight annuity - which would presumably come down to the margin the providers manage to manufacture over the gilt yield as you explained, vs their own profit margin.

Absent that, I struggle to see gilt ladders as the answer to anything other than bridging gaps until other income streams come on line / expenses go away. My rule of thumb would always be:

Only enough to afford your bread and butter? Annuity to guarantee it because you can't afford any downside.

Extra for jam and want to leave an inheritance? Annuity for bread and butter plus drawdown for jam

Loadsamoney and want to maximise inheritance? Drawdown, because you can easily afford to cut back.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82199743#Comment_82199743

They have deferred annuities in the US (called "longevity annuities") but not here AFAIK. Don't know why, they'd be very useful. I guess there might be regulatory issues or claims from disgruntled beneficiaries claiming their relative was mis-sold a product and they didn't understand, like you get with home reversion loans.

NotTightJustCareful

With an annuity you can get an enhanced annuity rate if you have an health condition whilst gilt rates are fixed the same for everyone. As you get older do you want the hassle of administering a gilt ladder ? Annuities are buy once and forget and its insurance product that can last for as long as you live, if you die early then you don't need the money but if you live longer you have yourself covered.