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@TA – excellent! Thank you.
For me though, retired at 60, linkers are guaranteed inflation-hedged cashflow. I’ve completed(?) my 7 year linker ladder that will take me from 67-73. I don’t count it as part of my portfolio at all but as term-limited guaranteed income. It is making me re-think my projected allocation to cash (or rather RL MM fund). Maybe a build out a small allocation to TR73 to capture the volatility? With interest rate rises predicted soon, now probably not the time though.
Apparently 72 is my expected healthspan, and I can see my horizons gently reducing after that, so the SP and small DB will be sufficient for necessities and SIPP/ISAs for anything above that.
Really looking forward to your article on a re-do of the defensive portion of the 60/40. Spicier assets – Nvidia? Options and currency trading? Shorting? Go big or go home! The mind boggles! 🙂
Great article. Planning on retiring in March 2028, so have built a nominal Gilt ladder, with gilts maturing in March 28,29 & 30, so locking in a 4.2 – 4.5% return, going forward from that planning to add index-linked gilts though can’t seem to find 2031 at present. Thanks for your blog, without it I would not have been able to do this.
Hi @TA. Thanks for the eagerly awaited second part of this series.
The issue for me is the desired simplification of the portfolio in case I fall off the perch before my missus. I could probably build a linker ladder from your in-depth instructions, but I am not sure I want to go through all that, and it would certainly be a step too far for the other half.
I have got the 60% down to two holdings – HSBC FTSE All-World and iShares Global Property.
The 40% is supposed to be 10% Cash (inc premium bonds), 10% Royal London short duration global indexed bonds and 20% mix of UK Government bonds and Global Govt bonds hedged to £. Slightly out at the moment as I am supposed to be rebalancing.
Beyond evening up linkers and nominal bonds, I don’t think the evidence you present here would push me into any action (allowing for risk appetite!). If I can get to two equity funds, cash and one each of short-duration linkers and nominal bonds across two S&S and two cash ISAs before I become ga-ga, I think I will have done a decent job for the family.
I look at the differences between the different flavours of bonds you quote and think – just go short duration and leave the money and the risk on the table.
I may be missing the subtleties, but I look at the data and don’t feel a strong urge to do anything different.
Still, at least I have a reason why I don’t want to do anything!
@old eyes, couldn’t your spouse just buy an index linked annuity with the 40%? That’s what my spouse says he’ll do if I die first.
And of course why have more than one equity fund?
Thank you for this.
Can I ask something and hope the hive mind can take a view?
Many of us invest in target date or stable %age based funds, and often, it’s because we know that the palaver of knowing what to balance, when, is beyond us. We just wouldn’t/couldn’t do it. We are not fettlers or tinkerers.
Here’s the question: isn’t part of the charm of vanilla 80/20 or 60/40 funds not so much that all assets perform inversely, always bringing home some bacon, but that they perform differently, and your allocation always sells (relatively) high to buy (relatively) low? Whether stocks or fixed income move up or down, together or separately, they never do exactly the same thing.
Are the benefits of agonising over all the possible forms of FI as nought compared to the risks of *<"^ing up your balancing, failing to rebalance, or timing the market yourself?
Very interesting work, thank you. I still struggle with the mechanics of linker funds. E.g. the Royal London Short Duration Global Index Linked Fund: Cumulative return last 5 years: 13% / 10 years 28%
Cumulative RPI inflation: 5 years 37% / 10 years 58% (!)
[all numbers to end April’26]
I noticed something similar for TP05 compared with US inflation. These are both short-duration funds. Still it seems that funds never deliver the inflation uplift.
I find it much cleaner to own individual linkers. For diversification, a few spaced out by 5-odd years of maturity will do. By default, hold them to maturity; or sell some to buy stocks in a crash.
It really is surprisingly *easy* to buy linkers at AJ Bell (unless one wants full control with a limit order or to optimise to the last 0.1% or so of spread). Check the approx. real yield on dividenddata, then enter an online market order for the gross amount to be invested, no calculations needed. In my experience, they execute quite close to the price for professional trades on IBKR.
Part 3: Short UK ILGS v (nominal) Swiss (CHF ‘ultimate safe haven’) and/or Norwegian (SWF backing) Govies v select (commodity producer) EM Govies?
@Sparschwein — *Once more with feeling* as I have written many times before (and this article mentions) the discrepancy is because those linkers were priced on negative real yields to maturity in 2020.
i.e. They were priced to return less money to their investors — in real terms — than they cost to buy. They were always going to lose money. Remix to suit. 😉
Someone might have owned them because they still had some role in a portfolio (I didn’t own them! But big pension funds did and will die on the hill of liability matching to say they were right to). But that was the fact.
Now, today, linkers are all on positive yields to maturity. Buy any linker and hold it until it matures and you will get your money back, plus inflation, plus some kind of (small) yield depending on the duration.
Note/aside: those guaranteed real terms losses you were potentially buying a few years ago weren’t because the linkers were in funds. People get confused about this.
If you owned an *individual* linker bought in 2020 on a negative real YTM and held it until 2026, you would have lost money in real terms. (You’d have got an inflation uplift to soften the blow, though).
A linker fund just holds a bunch of linkers. There are other complications to do with how they roll their bond holdings over to maintain maturity, but that is a separate (complicating!) factor.
Check out this share price of this individual linker that matures in 2027:
https://www.hl.co.uk/shares/shares-search-results/t/treasury-1.25-22112027-index-linked-gilt
It’s down from a high of c. 140 in 2020 to just over 100 today as it’s been ‘pulled to par’ to mature next year.
This is the ‘clean price’ of course. The ‘dirty price’ would include the inflation uplift. So you can see the mechanics of the (nominal) capital loss component playing out here.
Again, that situation / set-up — which pretty much wasn’t even in the text books, at least outside of Japan, and was caused by near-zero rates — is not the case today.
Linkers are all on positive yields to maturity again now.
Great post. As you’ve identified Linkers have different risk exposure than Nominal Gilts. I’ve just gone 50/50 – so 60/20/20 stocks/nominal/Linkers – on the basis that diversification is good and I know nothing.
“I think it involves an allocation to spicier assets than we put under the microscope in this article.” Trend?
@DH and Brod – LOL 🙂
@Vanguardfan – TI made the same point when we were kicking ideas around ahead of this post. I think you’re right, a retiree can opt for an index-linked annuity plus World equities for the upside portfolio.
@Old Eyes and George Smiley – your comments really drive to the heart of why I’m writing this series.
I want a portfolio I can recommend to my friends who don’t care about investing. Or that Mrs TA could run if I wasn’t here. Years ago I wrote her a letter to be opened in case of need. The investing section said (I’m paraphrasing): Sell the portfolio, buy Vanguard LifeStrategy 60, call The Investor for any help you need.
TI is a long-standing friend of Mrs TA’s too. Obvs I didn’t call him TI in the letter 🙂
I couldn’t recommend LifeStrategy now. Because it’s only fitted out to cope with one of two possible conditions we’ll face in the years ahead.
I believe that Vanguardfan has the answer for anyone decumulating from their late 50s. His strategy is known as ‘Floor and Upside’. The index-linked annuity covers essentials, the risk portfolio adds the extras. There’s no need to rebalance either to your point George. (I fully buy into the point you’re making re: complexity and human error.)
So my series really only applies to accumulators or those who can’t bring themselves to buy an annuity. Judging from annuity sales I think that’s a lot of people, though.
I’d like there to be a multi-asset fund balanced between inflation-resistant assets and nominals that I could just point people towards.
I don’t care if its actively managed. It just needs to be reasonably priced, transparent, and have a pretty stable asset allocation. As in, if I recommended it to a friend now, then it would still be much the same fund in a decade or two.
I’m not sure that fund exists. I have a few candidates (all identified already by the Monevator Massive). I haven’t examined them yet but TI knows them and they sound more like active manager jazz. As in, they could hold anything years from now.
So if that doesn’t work? @DH is pro- all kinds of filth 🙂 That’s great for him but not so much Mrs TA. I say that with all due respect. Just different needs and levels of engagement.
Right now, the closest I can get to a Vanguard LifeStrategy 60 that looks like it can deal with a rising or falling rate regime is:
60% World equities
40% Short duration linker fund
Either:
Royal London Short Duration Global Index Linked Fund (hedged to GBP) as per the test.
Or:
iShares Up to 10 Years Index Linked Gilt Index Fund (UK)
Also duration 5, lower cost, UK linkers only, shorter track record.
Until the multi-asset fund industry does better, I couldn’t come up with anything simpler that I could be reasonably confident in for a younger Mrs TA, or anyone else with years of accumulation ahead.
If I said something like 60/40 World/Gold. Well, they’ll just panic sell the gold when it drops 50% or whatever.
Anyone got any better ideas?
@George – re: sticking with the Lifestrategy 60 style status quo. The problem in a rising rate regime is that bonds become positively correlated with equities on the downside and it just knackers your returns.
The lowest sustainable withdrawal rates are all associated with periods like this.
The epicentre of the UK’s SWRs is 1910. In that rising rate period, equities and nominal bonds bomb together. They bomb so badly that they force a new low for keeping your portfolio solvent. Either you had to cut back harder on spending or you ran out of money.
Sorry for going on, but the US SWR is the same deal. It’s circa 1967 because equities and nominal bonds bomb together in 1973-74.
The US SWR is not the Great Depression. Equities bomb but bonds don’t. Bonds save the day due to their negative correlation in a falling rate environment.
The solution, as I see it, is diversification into assets that better cope with the full spectrum of threats.
@Sparschwein – Over the last 10 years every linker was weighed down by negative yields. It’s the same for the individual bonds as well as the funds.
The 0-5 yr index-linked gilt index cumulative return is about 31% over the last 10yrs.
At least now they’re all on positive yields. The funds too.
But I agree. I find buying individual linkers as easy as any fund or stock now.
@Gary Grand – Thanks for saying. Much appreciated.
@Finumus – if you know nothing then gawd help the rest of us. 🙂 I’m gonna get to Trend. @DH has worn me down. I’m slow and ponderous though. Much like my trading strategy.
😉 Yeah I love quant (TAA/trend/factors etc). Guilty as charged! Can’t get behind either stock picking (DIY or outsourced, because Bessembinder’s 3% or 4% / skewness: good luck with that, and to keep getting it right…somehow), *or* with ‘passive’ B&H (give Vanguard or whatnot money, then ETF tracker robot just buys the market blind regardless of price, macro, market structure, or effect on price discovery – what can possibly go wrong?) Speaking of which, conceptually it’s the same category of problem with Pension Fund liability matching using long duration ILGs in the ZIRP era on deeply negative yields. No price sensitivity. No mean reversion sensitivity. No sense, other than that’s the PF mandate, come Hell or high water, both of which (as they always would eventually) put in appearances in 2022.
So Tim Hales suggestion looks to be a sensible one. 20% short dated gilts and 20% short dated index linked gilts.
Something like IGLS plus the active fund mentioned in the article.
@ TA the only slight variation on index-linked that I’ve considered is 50% of fixed income in TIPS, via TI5G, and then 50% in the iShares up-to-10-year linker fund.
The Royal London global fund is already over 40% TIPS, so the above would give similar exposure to the US.
But if you’re willing to hold those two funds instead of RL, you get a shorter overall duration (TI5G is about 2.5) and lower fund charges (about 0.1%).
@TA – Thanks for another great article so fun to read!
I am also convinced that holding an index-linked ladder is the best option. I have now set a 5-year index-linked gilt ladder as the entire bond part of my portfolio. There is a missing rung (gap year for bonds?) in 2030 though.
My plan now is a safe floor covering all compulsory spending with the rest (for discretionary spending) invested in: 80% equities, 8% bonds (this 5-year linker ladder), 10% gold, and 2% cash. This is to increase the chance of portfolio growth, making peace with RPIG tendencies by reducing the chance of losing sleep over a dwindling portfolio when I eventually stop working. Any thoughts on this?
Cheers!
I too really wish there was a simple passive approach to the 40% (35% in my case), because as someone with OCD tendencies it’s not healthy for me to be obsessing over asset allocations and would be much better to just set and forget rather than fiddling. Over the years I’ve ended up with this mix (and welcome criticism of it!): 5% gold, 5% intermediate global bonds hedged to GBP, 5% 0-5y short gilts, 5% Royal London global index-linked as mentioned in this article, 5% money market, 10% defensive investment trusts (Personal Assets Trust and Capital Gearing Trust). I expect this could be simplified and this article rather makes me want to have more index linked, perhaps instead of money market. Anyway, thanks for another interesting article!
Just my tuppence worth Steve
I have managed a 23 yr retirement up till now with 3 global index funds only (2 equity and 1 bond)
Was 30/70 -currently 40/54/6 where 6 = 2 years cash for living expenses
Possibly success has been achieved by having a reasonably large amount of savings
Concentrating on this aspect of your portfolio which is actually under your direct control ie save as much as you can,live frugally and keep costs down and let the stockmarket alone to compound,don’t tinker and stay the course is a reasonable investment plan
Inflation linked bonds are certainly the way ahead for some investors but a little more complicated to use and I have avoided them -so far
xxd09
Thank you for another great article. I recently came across giltsyield.com which has a lot useful information.
@cm258 – yes, that’s a good point. Tim Hale was aware of the risks and in his later editions (before 2022) recommended shorter bond positions for older readers.
On a side note, I read his 2nd edition first. But for some reason, I later happened on the first edition. It contained a much more extensive chapter on bonds. That chapter included a chart showing the circa 70% losses for nominal bonds 1973-74 at the tail end of a thirty year drawdown. I remember reading it at the time and thinking, “Blimey, why didn’t anyone mention this before?” It rather blew the prevailing “bonds are safe” narrative out of the water.
The chapter was increasingly trimmed in later editions (because that’s what publishers do) and the chart was lost. But the massive bond bear was also confirmed by Pfau, and Dimson, Marsh and Staunton. The equivalent US bond meltdown was a little less severe but even longer in duration.
Essentially, the facts are out there, have always been out there, but are mostly sidelined or ignored. It’s a curious phenomenon. Perhaps there’s an analogy with pandemic planning pre-Covid:
Pandemic planners: “Maybe we should plan for a pandemic. These things are inevitable and really bad.”
World: “Go boil your head. There hasn’t been one in ages. We’re fine as we are.”
@LCD – that’s a great way to shorten the duration. Nice one.
@Tom-Baker Dr Who – you can cover 203o with UKTI 4.125 07/30 (GB0008932666). It’s an 8-month indexation lagger but that seems ok to me.
“80% equities, 8% bonds (this 5-year linker ladder), 10% gold, and 2% cash.”
This is your upside portfolio? With the essentials covered by another source?
Then I think you’re golden. You could reduce equities by 10% and include commodities if you buy into the historical evidence that they smooth out the downside without knocking much off the downside. Commodities are super volatile of course, so not easy to live with.
@Steve L and Warren – cheers!
@All – I’m 54 now and the last time I looked pretty close to the age where an index-linked annuity would be a viable option to cover the essentials. That was just a cursory check on a comparison site – I didn’t properly go into the market and get a personal quote.
But, I can feel the emotional resistance to buying an annuity rising within me. Does anyone else feel that?
I’m not clear on the cause(s). I think some reluctance to foreclose on my options. Possibly some resistance to the idea that I could be old enough.
I don’t think it’s that second one, but could be fooling myself. I was talking to a friend some time ago about how Mrs TA and I live in our “forever home” now. She’s the same age and freaked out at the idea of a forever home.
Bit of a random grab bag of thoughts there. All the same, I think I’m becoming the “annuity puzzle” incarnate.
Fascinating discussion and very welcome. As someone just preparing for retirement it is well timed too. I still struggle with the pros and cons of buying and holding individual bonds vs buying a fund despite the excellent Monevator articles that have enabled me to set up an index linked ladder (Thanks again). Re Annuities although I understand the simplicity of the situation one thing I struggle with is the giving the money away element – why not just buy gilts (either a ladder or a fund) and hold? The rates of income seem comparable from my small investigation and then I have something to pass on to my heirs rather than the insurance company.
The problem with measuring ‘drawdown’ this way, it’s only a meaningful measurement if you dump all your money into a given strategy at the top of the peak and then sell the lot at the bottom of the trough. It’s not a meaningful way of measuring loss if you accumulate over several years and then decumulate again over a few more years.
For example, if you dumped $100 into American stocks in late 1929 and then sold the lot in early 1932 you might have only got $15 back for an 85% loss. If you had been buying stocks throughout the late 1920s and then started cashing out throughout the early 1930s the actual losses experienced would have been substantially lower.
I don’t think anyone would encourage prudent investors to buy long term assets all in one go particularly at abnormally high prices and then sell the lot at one time without any de-risking beforehand.
@Mogr – The drawdown charts don’t depend on you buying at the top of the market.
They only require that your investing journey began before the market high. In other words, if you were 100% World equities on the eve of the Dotcom Crash then you were looking at 51% losses at the bottom.
To take your example, if your portfolio was worth $100 in September 1929 then it was worth $100 in Sep 1929. It doesn’t matter if you only invested the day before the crash or 30 years before. At market peak your portfolio was worth $100. Then you lost 85% by your reckoning. Does that make sense?
You go on to say that you could reduce that loss if you sold out before the bottom. That’s true, though you’re crystallising losses you could avoid if the market recovers.
So for example, I actually lost nothing in the Global Financial Crisis (my first bear market) because I didn’t sell.
That doesn’t mean it wasn’t scary as hell. It doesn’t mean I could avoid seeing that my portfolio was 36% down. And it doesn’t mean I knew the loss couldn’t get worse or would recover nearly six years later in real terms. The psychological impact is real. The financial one depends on your actions.
From that perspective, the drawdown charts are the best way I know of to represent what a past market crash looked like to participants.
All the same, I think they’re about as adequate as a book describing a car crash in conveying the actual experience.
@Vanguardfan #4
I am the lucky beneficiary of a DB pension, and so we already structured ‘floor and upside’. Now more or less retired, the floor is currently paying for everything, and the upside is accumulating for the benefit of us later in life and for the next generation (if you have seen my fireside chat, you know I have a dependent adult son with an autistic spectrum disorder that we need to provide for until his death).
In these circumstances, an annuity is less attractive, as survivor’s DB pension will cover a fair amount of expenditure and simple drawdown will cover the rest. If I can die with everything except the house in ISAs or premium bonds, my partner can draw what she needs when she needs it, without tax implications, and it is just a question of providing the annual pension income on the self-assessment form.
We feel we are better off preserving the capital in case of an ‘Oh Shit!’ event, rather than converting it into an income (at rates that are still not terrific), and losing that capital from the estate on death.
The complexity will arise when she also dies, as there will probably be IHT and trust issues for my son. Fortunately, not our problem. The estate will need professional help anyway.
Why the property fund as well as FTSE All-World? History. That holding dates back to when I was being sophisticated and ‘clever’. It has not been traded for years, and it is still doing OK. So it ends up on the list to deal with at some point in the simplification.
@TA #10
You have me quite accurately tagged. I am looking for a high probability of being able to survive to the end of our lives with the plan for the next generation intact, and also to be able to sleep comfortably at night.
In this area, I am now very definitely a satisficer rather than a maximiser/optimiser. In other areas of my life that really hold my attention, I remain a maximiser. Investment is not a hobby, it is a regretted necessity. It is interesting, but not something I want to spend a great deal of time on.
(that may have been less constructive that i had intended)
Imagine 2 months before your retirement date you are sitting on £1 million in inflation linked gilts at negative real rate and annuities will pay out 2% +RPI per year. Then 1 month before your retirement date rates suddenly increase massively and you have £500K in linkers in the pot with annuities paying out 4% +RPI. Sure you would have ‘lost’ half the ‘value’ of the pot in on month but you still get exactly the same £20K +RPI per year to retire on.
*Rationally*, you should only care about the market value at the point you buy and sell, and if you buy and sell over a number of years (rather than all in one go) you should care about performance averaged over a number of years. A stock market quickly bubbling up, crashing and then reverting to normal conditions will have limited impact (and free rebalancing bonus!) a bond market slowly and steadily declining over many decades is much more impactful in realised long term returns.
If you want to measure how well/badly a given strategy would have worked historically, it doesn’t make sense to model it under different conditions than ones you are going to use the strategy under. Personally i like to measure the drawdown of the 5 year moving average on historical returns of a strategy because that’s about the minimum timescales i would consider moving large amounts of money in/out without derisking first but different models would be more applicable for different situations (eg ~30 years in, 30 years out for retirement savings).
@old eyes – “Investment is not a hobby, it is a regretted necessity. It is interesting, but not something I want to spend a great deal of time on.”
Beautifully put.
@M0gjr – Heh, I appreciate that, and your follow up makes sense to me. The issue being that we don’t know the conditions we’ll meet. I think you may be interested in this paper which analyses multiple “whole of life” outcomes for different investment cohorts:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5267778
As in, what happened to different generations when you measure outcomes across their entire accumulation and decumulation time horizons.
This article isn’t in the same class but it was my attempt to show how different retirement journeys could be:
https://milestone-vector.live/safe-withdrawal-rate-health-indicators/%3C/a%3E%3C/p%3E
The most astonishing one was the 1896-ers. They look like they’re cruising, then they get absolutely screwed towards the end of their time.
Conversely the 1960 cohort look damned. But they’re saved by the miracle of the 1980s – the all-time best decade for investment returns.
@Robin H – re: annuities – some readers have expressed concerns about their ability to run a linker ladder if they experience cognitive decline. Or whether their partners could run it if necessary. The other advantage of an annuity is it solves longevity risk i.e. it’ll last as long as you or your partner does. I think you’re right that many people don’t like the idea of leaving a legacy to the insurance firm 🙂
@TA (#20) – Thanks for mentioning UKTI. I had missed this one because I was only looking at the 3m linkers.
Yes, I agree with you that having commodities can be very useful in the sort of situation we are just going through right now. But that is exactly why I would not add them now with this oil market disruption still going on and commodity prices so high. I’m thinking about adding somewhere between 5 and 10% (as you wrote by reducing equities from 80% to 75% or 70%), when the price falls to more normal levels.
Great article and comments, thank you. Just a couple of notes on tools not recently mentioned. I use YieldGimp for gilt and linker visuals when buying. The chap running it made it into a paid app but it’s affordable, after years of providing useful online tabulated data for free. It would be great if the charts were a bit more interactive but I find the chart overlay of price, gross real yield and price x index ratio very useful, as well as the up to date data.
Ramin of PensionCraft has also recently improved a lot of gilt tools for members (though I am retired from membership at the moment). He’s probably responsible for a lot of the national (and maybe even USA) amateur knowledge of linkers through his YT channel.
I think the single most important thing I have learnt about gilts is not to blindly buy funds of gilts. Luckily I learnt before 2021.
With American, UK and other government debt very high and increasing, I find it difficult to justify allocating more money to bonds.
Currently 10% global bonds, average duration 8 years.
The few percent I have in broad commodities (thanks!) has been pretty good in balancing out the Iran war effects.
The 10% in cash is sitting against my offset mortgage.
Gold feels too expensive, despite the recent price decline.
Generally it feels like a difficult time to find great diversifiers.
I second the recommendation for Yieldgimp, brilliant tool to set up a linker ladder and I found it easy to execute with AJ Bell. In my view a much better bet than an annuity. Like TA I also have an in the event of my death letter for Mrs Voce.
As far as commodities, mamma mia, I found all that contango, fandango and backwardisation too much to bear, so I have a bit of metals Cu & K with BHP, energy with XOM and softs with ADM. I also own gold as its a bit like land, they are not making it anymore but just in case that’s wrong I received my requested allocation of SPCX today. Always a fan of a good Sinatra song.
https://giltsyield.com/curve/
This seems very similar to yieldgimp and is currently free
I am slightly perplexed by the dismissal of annuities as a bad deal compared with constructing your own floor income using a gilt ladder. I fear the point is being missed slightly.
Annuities are primarily longevity insurance. They pool risk and those who die early cross subsidise those who live longer. Overall (and ignoring the cut that goes to the insurer, which I acknowledge is not transparent), they should provide a much more efficient (ie cheaper) approach to longevity insurance than everybody self insuring (via holding individual gilt ladders to provide personal life long floor income).
Obviously, as is always the case with insurance, you don’t know in advance whether you will be in the group that benefits, but I would have thought that many Monevator readers would indeed expect to have a longer life expectancy than average.
Yes, if you die earlier than average, you may have forfeited some of the unused money you could have left to your beneficiaries. But designing your own insurance is not easy – how many years do you put in your gilt ladder? If you over estimate, that is wasted money too. If you underestimate, well, then you are on cat food…
So I’d see the two main benefits of annuities as 1. insurance against outliving your assets and 2. simplicity in your dotage. The downsides are 1. die early you potentially have wasted your insurance premium and 2. the additional cost for paying the insurer to set up the collective scheme.
I do understand that it is difficult to convert (some of) your stash into an income stream of unknown duration. I think this is mainly a psychological issue though. Maybe it will look good value once you are 75 or 80, and have even less inclination to construct gilt ladders. I am fortunate that I have a good DB pension, so I don’t actually have to experience the pain of purchasing my floor income. I certainly appreciate it though.
@TA – the main reason for me to get an annuity would be longevity risk as you say. For long I thought of an index-linked annuity as the “plan A” when the time comes. I’m not sure anymore, mainly because hedging longevity requires full trust in the chosen insurance company’s longevity over 3-4 decades. If there’s some doubt that the company might go bust, or renege on the inflation uplift with backing of the regulator (which may happen in an inflationary crisis), then a linker ladder plus some stocks for long-term growth looks the better option.
My concern stems in part from the experience during the GFC when big names suddenly went bust; a realistic view of whom govts will back in a systemic crisis (surely the banks and insurers, not the little guys pensions); and recent reports of “regulatory arbitrage” deals that expose customers to Private Credit risks. From the FT [29 Apr 2026]: “In funded reinsurance deals, both insurance liabilities and the assets backing them are ceded to a reinsurer, often in a foreign jurisdiction such as Bermuda. Many such reinsurers are linked to North American private capital groups that invest UK pension assets in their own funds.”
The BoE seems to be onto this particular loophole, but is the BoE doing enough about it? And which other loopholes and hidden risks are there?
@Sparschwein – my understanding is that lifetime annuities are 100% protected by FSCS, in the event of the insurer going under. I suppose you may mistrust that, but its probably as good as it gets.
@Vanguardfan
> my understanding is that lifetime annuities are 100% protected by FSCS
Yes I found this too, and did some quick enquiries about this. (AI results I haven’t verified, so treat with some caution). The upshot is, the absolute maximum the FSCS can levy per year is 1bn, but a major UK life insurer usually holds anywhere from £15 billion to £40 billion in annuity liabilities. The BoE estimates the current exposure of UK life insurers to offshore funded reinsurance deals at £40 billion, and they are keeping this loophole open until at least next year so insurers can load up on more such deals.
The point is, FSCS is inadequate for even one insurer, and in a major crisis, it’s likely that several insurers are affected. Then we’re back to hoping for bailouts from the Treasury, which looks less realistic today, and who knows what will be in 20 years.
A more reassuring point is that UK law gives annuity holders status as a preferential creditor so, when the liquidator starts clawing back whatever assets are left (including trying to drag back the assets sent to those offshore third parties), you get paid first, ahead of the insurance company’s banks and bondholders.
Well I guess in the event of major meltdown what do we really have? Sovereigns in the sock drawer?
I guess there are different scenarios that are more or less likely…
– Let insurers cancel inflation uplift for index-linked annuities, after heavy industry lobbying/scaremongering with threats of a financial crisis: Quite possible. Number of affected voters is smallish, the matter is too technical for the public to care, and pensioners with annuities aren’t exactly your pitchforks-and-torches mob.
– Let one or two major insurers go bust (and leave annuity holders in limbo): Possible, and there are good principled arguments for this, moral hazard and such.
– UK govt debt default, stops paying interest and imposes haircut on gilt holders: Unlikely imo. They know the market will remember and demand a risk premium for decades. And it’s much easier to have the BoE monetise debt and pretend the state is solvent.
@Vanguardfan – I wholeheartedly agree with your points about annuities being a good deal. The reluctance I can feel is 100% an emotional / psychological issue. My rational faculties are in favour so long as I retain an upside portfolio.
@Sparschwein – I’d hope that the UK government would bail out any systematically important institution in a crisis. That’s how it went during the GFC anyway.
My personal balance sheet of risks would weight me going gaga higher than the insurer failing to pay. I’m halfway there already, after all 🙂
I’m a little more pessimistic about my personal longevity risk than I was. Half my genes say this could be a nice problem for you to have. Half say don’t worry about it sunshine.
Good article and interesting comments thanks. The annuity puzzle is a tricky one, and perhaps nice to have. It’s definitely different if you are hoping to leave any kind of legacy. I can only imagine an annuity as a small top-up to SP, later in life. For me the SP is more or less the floor anyway.
@TA – I agree politicians’ first thought would be bailouts, I just think UK finances (like most countries) are much tighter today, possibly too tight for another major crisis. Before the GFC, UK’s debt/GDP was some 35%, which doubled by 2010 and now it’s ~95%.
Maybe in a few years we’ll have a decent whole-genome plus epigenome test for longevity prediction. Something to help estimate the odds.
Thanks for the article – very informative as usual.
One point I don’t see mentioned re annuities: Once you have moved a SIPP into drawdown (and probably taken the tax free lump sum) you cannot then buy an index-linked annuity. All the providers (when I looked into this in detail a few months ago) said I could only buy a “purchased life annuity”, for which the only inflation protection is an optional fixed annual increase.
So I (at 75) am sticking with a 10 year rolling (for now) linker ladder; the low coupon ones in a trading account with AJ Bell (very easy to deal) and the high coupon ones in an ISA with HL, who do online dealing for the 8 monthers.
@Michael Chandler – Thank you for pointing that out. What a rubbish rule.
I bought a PLA for my mum many years ago now. I’d have to check but uplift was 5% per year IIRC. Overall, that leaves it a nose ahead of inflation so it’s worked out okay so far.
AJ Bell is great for linkers. Do HL not offer online trading for the 3-monthers?
What about Vanguard Research’s (Schlanger et al., 2023 and Cheng et al., May 2026) Capital Markets’ Model core-satellite approach to dealing with inflation?:
“While equities continue to offer the most reliable protection against inflation over long horizons, their short term relationship with inflation is weak, leaving some investors exposed during inflationary shocks. Assets such as commodities and TIPS provide more direct inflation sensitivity. Relative to a market capitalisation weighted core portfolio, these strategies will have a greater chance of achieving higher median returns over the next decade, albeit with higher tracking error and periods of under performance.”
There’s also Man Group’s 29 May 2026 paper on cross asset correlation:
“Gold plus Value plus Quality looks to be an admittedly impressive combination and has the added advantage today that while one-third of the portfolio would be very expensive, the other two remain at attractive valuations”
And: “Trend drawdowns are distinctive in that they are heavily tilted toward smaller sell-offs. Despite having overall volatility not hugely dissimilar to equities, defining small / medium / large thresholds at the same level (10/20/30%) puts almost 90% in the ‘small’ category. This likely speaks to the dynamic nature of the strategy: like Kipling’s leopard, it can change its spots as the environment changes”
Can’t help thinking Winton Trend Enhanced Global Equity Accumulation GBP Hedged (100% Trend Following with hard and soft commoditise including metals and energy, with precious metals, with FX, with interest rates, with Government Bonds, and long/short stocks; all overlaid with 100% in global equity market capitalisation weighted tracker) is the way to go for a one stop shop fire and forget. Yes it’s 1.1% p.a. OCF but looks what you get. Beats the offer from RICA at 1.07% p.a. IMHO.
And if you were an aggressive accumulator who wanted to go for growth, but at the same time wanted to play defensively on the main part of the portfolio because of (inter alia) inflation risks (etc), and who also couldn’t handle taking action more than once every three months (quarterly rebalancing); then there’s always a UK (LQQ3 v TQQQ and CSH2 v AGG) implementation of Jason Kelly’s “9Sig” to look at with maybe a 5% to 10% sleeve of the overall portfolio (warning daily reset leverage ahead, DYOR, and obviously neither advice nor any sort of recommendation – everyone’s mileage will vary).
M Chandler this doesn’t sound right “One point I don’t see mentioned re annuities: Once you have moved a SIPP into drawdown (and probably taken the tax free lump sum) you cannot then buy an index-linked annuity.”
Do you have any links to the rules for the providers you investigated?
Assume this is in the UK?
@DH – That Vanguard research finding is what I’ve been arguing in favour of for some years. My question is: where are the Vanguard multi-asset funds that offer that kind of portfolio?
Thanks for the Winton tip. One question I have is: given the fund industry’s long track record of offering products that look great in back-tests but then fail to work quite so well in practice… what is that convinces you about this one?
I don’t mean to be dismissive. It’s a genuine question. When I do get round to looking at this fund this will be a question I’d like reassurance on.
Interesting read as always, thank you @TA. The comments as well.
Like many, I’ve never been keen on annuities, but there may be a sensible middle ground: buy an index linked annuity to provide only a partial floor, and simplify most of the rest of the portfolio.
Another option might be to delay annuitisation until there’s only a sole surviving partner, particularly if that partner isn’t keen on managing investments.
For those wanting to gift more in their lifetimes, and considering the changes to include pensions for IHT, doesn’t an annuity open the way for neatly making gifts out of excess income?
I’d say 54 is too young to be considering annuities – you need to be older and have a few comorbidities in the mix!
Looking at some other posts, it might be useful at some point to revisit the practical question of “what should my partner do on my death” or, more importantly, “what should I do before my death.”
@Quorum – Interesting. I’ve had a very brief search and the usually good Aberdeen techzone is saying drawdown funds can be annuitised.
https://techzone.aberdeenadviser.com/public/pensions/annuities-scheme-pensions
However, others are saying that you can’t partially transfer crystallised funds.
But then AJ Bell claim there’s a specific exemption to this rule for lifetime annuity purchases. I can’t copy and paste the specific passage in the pdf, so see p. 2 under Drawdown transfers if you wanna look. Link here:
https://www.investcentre.co.uk/literature/pension-transfers-guide
Clearly needs further research to resolve.
@Michael Chandler – does any of this cast more light on the problem for you?
@Mack – Cheers! And agreed, there are many creative ways to skin this particular cat.
“what should I do before my death.”
This seems important. In my limited experience so far, things are often left in a mess.
We’ve done a couple of articles on the topic up to now. I see from my post that my current advice to Mrs TA is a Vanguard LifeStrategy 60, so I need to dig out the paperwork and score that out. Blimey, the fun never stops around here.
https://milestone-vector.live/partner-manage-family-finances-in-the-event-of-your-death/%3C/a%3E%3C/p%3E
https://milestone-vector.live/when-i-die-financial-affairs-fit-for-the-afterlife/%3C/a%3E%3C/p%3E
The Winton Trend Enhanced is an interesting idea for people in accumulation who don’t have any other leverage (e.g. mortgage). I’d still add some Europe/Japan/EM ETFs to dilute out the extreme US stocks overweight, and some gold and cash to diversify the defensive part.
The main catch is cost. On top of the OCF there will be significant transaction costs (always with Trend) and financing costs for the leverage. There is no free credit, somehow the fund needs to pay at least the risk-free rate for the leverage. I think it’s built into the futures.
Regarding buying annuities from crystallised drawdown funds. My understanding is that the regulations permit this – and they should be pension annuities and not purchased life annuities (which are taxed differently). This is certainly what Pensionwise guidance says.
However, possibilities in the regs don’t always translate to practical availability. For example as pointed out, some providers don’t allow partial transfers out of crystallised funds, again I’m pretty sure they could.
It would be interesting to know which insurers/platforms have said it’s not possible to buy a pension annuity using crystallised pension funds.
If it is truly impossible (in practice), the workarounds would be to avoid fully crystallising your pension until after you’d bought the annuity with the uncrystallised pot, or to split your pot between different providers.
Just to clarify: The inflation-linked ladder is not part of my safe floor. My safe floor is the state pension with an inflation-linked annuity (RPI floored at zero). It will cover all our compulsory expenses without having to use my wife’s state pension and small DB pension. The inflation linker ladder is only to cover the possibility of having to leave the workforce before the state pension age (I will need to rebuild it once from the remaining cash each year as it is not long enough at the moment but more than the minimum needed each year).
I know insurance companies can break and the FSCS/government might not be able/willing to honour the promise of 100% protection. But it is not possible to reduce the risk to exactly zero. We need to compare this to the very low level protection available for investments, the problem that inflation linkers will most likely be the first gilts to default if disaster strikes (it is similar in nature but much lower than the risk of foreign-currency denominated emerging market bonds and is actually reflected in a small discount in the market price of every linker in comparison to the ideal fair price without this risk). In fact, there is an argument that it does not make sense to demand that a retirement plan should have more than 80% chance of success (https://www.efficientfrontier.com/ef/901/hell3.htm):
`History’s best-case scenario was the Roman Empire, which survived more or less intact for about seven centuries (if you ignore the odd sackings of the capital after 200 A.D.).
A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless. ‘
So perhaps all we can do is to try to diversify all the risks by getting income from various sources: a bit from the state pension, a bit from annuities, a bit from a globally diversified investment portfolio held across different investment platforms and made up of funds/ETFs from different investment companies (preferably from the three that are too large to fail).
BTW: There is another advantage to having part of your expenses covered by annuities. As long as they are lifetime (not investment linked) annuities, they do not trigger the MPA. So if you are still working, your annual pension contribution allowance does not get reduced to £10k per year. Moreover, because 15-year gilt yields have been rising significantly, annuities are a much better deal now. I think inflation-linked ones are really worth buying now. You can get a joint one with a rate of over 4% and the floored inflation correction. That is better than the so-called 4% rule for withdrawal rates!
#45 & #47 @TA & @Sparschwein: true on both counts but….
1. What’s sauce for the goose is such for the gander. Returns series analysis here (by @TA for MV) for UK and global equities (inc. SCV), broad commodities, gilts and gold also rests upon past data. The past isn’t going to be isotropic with the future. *If* you embrace back testing for some things then, by parity of reasoning, you have to do likewise for others.
2. Some people really do just want the one fund, and no rebalancing. I think WTEGE ticks a lot of boxes for them. You’re getting 100% TF/100% cap weighted DM equities. You’re getting Winton with their solid HF record with TF going back to 1997 (open to retail since 2018). It’s transparent. The use of rolling futures is very capital efficient and volatility reducing compared to the (potential nightmare) of ‘chop’ with daily reset leverage products. The operating cost for the 100% DM equity overlay is quoted at 30 bps (management fee for the TF strategy is 80 bps). In comparison, with volatility drag cursed daily reset levered products they can easily hit 700 bps ‘all in’ with the fees and finance costs; and can only make ‘sense’ (if ever/at all) with a fully dynamic asset allocation ruleset, which actively tries to turn the (otherwise sever) disadvantage(s) of volatility into the advantage and basis of the strategy (e.g. as with Jason Kelly’s “9Sig” or a full rotation leverage strategy using 200 DSMA etc). You can never B&H such strategies IMO, even in a long up trend asset (i.e./e.g.: since its inception in February 2010, ProShares UltraPro QQQ (TQQQ) has generated a nominal total return of over 37,000%, roughly a 40% annualised return, driven by one of the longest bull markets in history and the meteoric rise of mega cap tech stocks tracking the Nasdaq. But if you recreate a synthetic TQQQ using data from QQQ since it (QQQ) started in March 1999, then you find that, had it traded then, TQQQ would have fallen 99.8% over 2000-02 and would still be well underwater with the further crash in 2008-09. In stark relief to which, the plain unlevered QQQ itself is up 1,562% since March 1999). Given this, for a B&H investor (as opposed to one using TAA) the only responsible use of leverage is capital efficient return stacking, with anti or low correlated assets and strategies, and using low cost professionally managed rolling futures. That basically narrows the field at the moment in the UK to Winston and it’s WTEGE Fund.
3. Personally, I would be going for something more like 40% WTEGE, 20% SCV (using AVSG with ZPRX and/or DGSE), 5%-10% IWMO (Large Cap Momentum gives a nice anti correlation to SCV here, but is more volatile than value as a factor, and so needs to be sized accordingly), 20% WGEC (so you get some permanent global high quality Gov bond exposure), 5% into infrastructure trusts and REITs, and 5%-10% in alternatives (listed Global Macro HFs) and defensive trusts like BHMG, Man AL and RICA.
TB-DW: Just now reading your Roman Empire comment: civilisation collapse can take longer than one might think. Historically it has been very much a long process, and not a single sudden event.
To take your example: Rome was besieged/sacked by Gauls, Visigoths, Hunnites, Vandals and Ostrogoths in 390 BCE and in 409/10, 453-55 and 476 CE (and by Holy Roman Emperor, Charles V’s, mutinous unpaid mercenary troops in 1527).
But the Eastern Roman Empire at Constantinople (pre 330 CE Byzantium) from 395 CE was ascendant, especially during Justinian’s reign (527-565 CE), and only began to wither after the Arab conquest of Byzantine Egypt in 639-45 CE.
Even then, it held out, and was able to split from the Catholic Church in 1054 CE and to thereafter remain the dominant force in the Mediterranean until it was eventually done in for as a world power by (ironically perhaps) the Knights of the Fourth Crusade in 1204 (who, in effect, replaced it, for a time, with the Latin Kingdom (until 1261)).
It then still continued to exist, and, in a sense, would do so even after the fall of Constantinople to Ottoman Sultan Mehmed II in 1453, living on in the remnants of the Kingdom of Trebizond until 1461 and at the Principality of Theodoro (on the Crimean peninsula; of all the places for ‘Romanism’, as then practised by this outpost of Greek speaking Goths, to die) in 1475 (CE), some 2,228 years after the Kingdom of Rome appeared in 753 BCE.
@TomB – “inflation linkers will most likely be the first gilts to default if disaster strikes”
That’s a good point. Are there some sources or references on how the market is pricing this? (Genuine question, I want to understand the options especially when it’s an irreversible commitment with an annuity).
I’ve been pondering if I should add some TIPS into the linker ladder. Advantage, diversification of default risks and higher real yields than linkers. On TIPS there is some research that shows a discount (better yields) vs nominal treasuries because the latter have extra demand for their role in the financial system. Disadvantage: currency risk.
Ideally I’d like to set us up so that the next GFC-level crisis can happen (50/50 chance over the next 30-40 years imo) and we needn’t worry because our basics are covered.
Agreed, 4% inflation-linked is very attractive, also compared with linkers (2.0%-2.3% real on the longer maturities). Almost too good to be true?
@DH, I am in awe of your posts but have to admit I cannot grasp the sense of the investment grail that you seek. I read your posts but there is a constant theme in my mind of the most memorable tune on U2’s Joshua Tree album. Would you like to describe what you are looking for?
@TA #42 and #47, and other commenters
I have dug out the (paper) file and find that in my comment #41 I mis-stated my experience looking into annuities.
For background (skip if bored) we have over 20 years in retirement been shifting investments from SIPPs to ISAs, taking the maximum withdrawal without going up a tax band (initially zero to basic rate, more recently basic to higher rate). I think that income tax rates are only going to go up, so drawing down our SIPPs seems sensible. Hence the value of my drawdown SIPP was rather low so I wanted to supplement with cash (taken from my wife’s drawdown SIPP!!). That is what restricted me to a PLA rather than a Pension Annuity. When I researched in October last year there were only two providers of PLAs – Aviva and Canada Life – and neither would offer an index linked annuity, just the usual 3 or 5% annual increments.
My personal opinion is that inflation lies ahead – how else can our government deal with the debt crisis? So index linking is my way forward and, informed by Monevator’s excellent articles over recent years, I have ‘mastered’ the linker ladder process. Hopefully we have a few years before dementia complicates the matter!
@TA #42 No, all the 3 monthers still have to be telephone dealt at HL. Similarly with II, with whom I still remember a couple of marathon telephone sessions last year. But now it’s so much easier with AJ Bell, and their pricing is good too.
Indeed so @Bassavoce #55 (and it’s a beautiful album, BTW).
My Holy Grail / Philosopher’s Stone is, I think presently:
– For 90% of the overall (SIPP/ISA/GIA) portfolio: Essentially achieve an ‘inflation proofed’ total net return (though ideally aim for RPI +2% p.a., although not a given), but with no more than intermediate bond duration like volatility. So a better Sharpe/Sortino though (albeit one obviously with lower raw returns) than for either a 100% global equity portfolio, or for the classic allocation of 60% equities / 40% long duration bonds.
– For remaining 10% of the portfolio as starting capital (this is where it gets unconventional): On a 15 to 30 year view (up to my latter sixties through to my early eighties) of exchanging a 90%-99% odds of a capital loss (likely a near complete one) for a no less than a 1%-10% chance of a not less than 1,000 fold gain, using a system which a basically numerate sixth former could competently execute on. If that sounds extravagant (and it is), then this is the type of ‘space of ideas’ which I’m fishing in:
https://open.substack.com/pub/inverteum/p/the-158m-algorithm-triple-accelerator
@Sparschwein (#54) – Yes, there are. For a long time people have been puzzled by a strange mispricing (arbitrage) in inflation linkers. You can synthesise an inflation linkers using a nominal bonds and inflation swaps. But if you do that it will cost you more than the inflation linkers you can buy in the market. Somehow the market price of linkers is at a discount in relation to the market price of nominal bonds. This paper claims that there is evidence that this discount is to compensate investors for there being a greater risk of default for linkers than nominal bonds:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3185307
@DH (#53) – I was just quoting William Bernstein (https://www.efficientfrontier.com/ef/901/hell3.htm). I think his point was not about how long a civilisation could continue to exist in a diminished form until it eventually disappears asymptotically, but how long it could remain stable enough politically and economically for people to be able to keep their lifestyle, wealth, normal life, and comfort.
@michael chandler thanks for clarifying, that makes more sense.
The purchased life annuity market is indeed small, which I guess restricts the offering.
One thing that puts me off buying more linkers is that I don’t fully understand why they show at a loss in my portfolio (I know it’s something to do with the accumulated indexing not being shown but the details elude me).
I know TA explained this somewhere, I’ll have to track it down again..
Thr Bernstein comment is sobering and a good reminder that all of our optimising and intellectual indulgence (insert cruder word there) needs keeping in perspective. 80% over 40 years or so does indeed seem wildly optimistic for survival of society in its current form given existential threats from climate change and others. I may not be alive for the worst of it but won’t someone think of the children? Mine are emerging into an adulthood marked by job insecurity and scarcity already. Cheery thoughts for a Sunday morning.
@56Michael Chandler
For a few years I’ve been doing the same process of taking withdrawals from my SIPP and moving into ISAs while staying within the 0% then basic rate tax band. Some goes in stocks and shares ISAs and some goes into fixed rate cash ISAs. In the cash ISAs you can usually get an interest rate of about 0.5% above the Bank of England base rate fixed for a couple of years, which seems very good compared to short term bond or money market funds, and there are no fees or yo-yoing prices (-: Currently, for example, you can get 4.55% fixed for 2 years which compares well with short term gilt yields ( https://www.dividenddata.co.uk/uk-gilts-prices-yields.py )
@TomB – thanks for the link and the explanation. So there’s more to TIPS-vs-treasuries mispricing than the “convenience yield”.
I’m coming to think that all “guaranteed” inflation protection is potentially on the chopping block in an inflationary crisis.
Linkers are the basis – if UK govt defaults on them, then indexed annuities will almost certainly default too. And no bailout if state finances are that dire.
On the other hand, insurers can go bust individually, or ditch indexing commitments collectively, without UK govt having to declare bankruptcy (and there are strong incentives for governments to avoid this).
@all – this is a great thread. Thank you!
@Vanguardfan – yes, you’re right it’s because most brokers show the clean price (inflation stripped out) and not the dirty price (bond’s lifetime inflation indexation included).
AJ Bell actually do show the dirty price which is another reason why they’re a good place to hold linkers.
I posted a spreadsheet here that enables you to calculate the dirty price:
https://milestone-vector.live/index-linked-gilts-portfolio-tracker/%3C/a%3E%3C/p%3E
But it’s a bit of a pain. I’ve pretty much automated it now behind-the-scenes but there’s still a few things to iron out before I release that one.
Yield Gimp shows dirty price, Tradeweb, lategenxer: https://lategenxer.streamlit.app/Gilt_Ladder
it’s just another one of those things that you get used to, though with AJ Bell you don’t have to.
@Sparschwein – it’s not hard to imagine a crisis that overwhelms the capacity of the State and forces it to default. Hence diversification. Commodities or gold or your house being potentially useful in this regard. I think the awareness is useful but it’s important not to overweight the risk either
One of the advantages of having a large amount of index-linked debt is that it forces the BOE to snuff out the threat.
@DH – “*If* you embrace back testing for some things then, by parity of reasoning, you have to do likewise for others.”
In principle I agree but in practice some members of the fund industry don’t play ball.
For example, if I run a backtest and tell you the ideal portfolio is:
17.5% commodities
18.1% gold
2.4% long bonds
62% small value equities
Then I try to sell that to you as a product, you might very well call BS.
When you dig into that product it turns out it doesn’t actually invest in small value equities. More like mid value to large which isn’t as good. Meanwhile the commodities don’t bear much resemblance to the historical index but are convenient for the manager to buy. Turns out the strategy also generates high trading costs but the backtest ignores that friction. Then future performance isn’t as glossy for this particular lock-up as in the past (an all too likely possibility which was glossed over in the marketing literature) and so on.
That’s the kind of thing I’ve stumbled across in the fund industry and more besides.
FWIW, a comparison between an inflation protected annuity and a linker ladder needs to be done carefully and will critically depend on the assumptions of longevity. For example, as of last week an RPI annuity taken at 65yo had a payout rate of 5.3% (single life) and 4.5% (joint life, 100% beneficiary).
Using ONS mortality rates, for a male at 65yo, there is a (roughly) 50% chance of living to 85yo (i.e., 20 year planning horizon), 34% chance of living to 90yo (i.e., a 25 year planning horizon) and 3% chance of reaching 100yo (35 year horizon). Currently, a collapsing linker ladder covering those horizons would have withdrawal rates of 5.7%, 4.9%, and 3.9%, respectively. In other words, for a single (male) retiree only constructing a ladder to life expectancy (20 years) would provide more income than buying an annuity, but with a 50/50 chance of outliving the income stream.
For a couple the calculation of the chances of one or both living to a given age is slightly more complicated (e.g., for a male/female couple the chance of one or other living to 100 is about 9%), but the planning horizon with the same chance of failure will be longer.
For those with a legacy motive, it is worth noting that taking inflation adjusted withdrawals from a portfolio (i.e., the SWR approach) does not guarantee that there will be any legacy or even that income will last a lifetime. For a linker ladder, the ‘die with zero’ is built-in in the unlikely event that you get the planning horizon exactly correct. I note that adding a lengthy guarantee period to the annuity (which will have less effect on the payout rate of a joint annuity than a single life) will provide some legacy in the event of an early death.
@Alan, thanks for providing some numbers to illuminate the point I made much earlier in the thread. I’d be interested to know the age at equipoise – ie how long a ladder can you build for the same cost as an annuity – and the probability of living longer than that. Because that’s essentially what you’re paying for.
@Vanguardfan (#67)
Using the lategenxer ladder tool with an immediate start of income, a ladder of 22 years matches the 5.3% of the annuity (single life at 65yo). Looking by eye at the graph on the ONS life expectancy calculator*, for a 65yo male, the chance of reaching 87yo is around 45%. For a 65yo female, the chance of getting to 87yo lies somewhere between 65% and 70%. Since they became unisex, annuities are more attractive for females.
For a ladder to match the joint life rate of 4.5% it would need to be 28 years long (i.e., to 93yo for a 65yo). Assuming a male/female couple, the chance of a 65yo reaching 93yo is roughly 30% and 20% for females and males respectively. The probability of both dying before that age is therefore (1-30/100)*(1-20/100)=0.56 (i.e., 56%) which means the odds of one or both outliving the ladder are about 44% (i.e., 100-56).
* ONS seem to have removed the spreadsheet version of the life expectancy calculator which would allow more exact figures. The raw data (and the mortality tables used by insurance companies) are available for more accurate calculations.
Thanks, that’s really interesting ()
To my mind it makes a stronger case for the annuity, but I imagine others will look at the numbers and conclude differently!
@Alan – these comparisons are very helpful, thank you.
@TA – yes the combination of house plus a few percent each in gold (coins, CGT-free) and commodities should do as a hedge.
As for the choice between linker ladder and indexed annuity for baseline income, I’m still in two minds. Annuity rates look attractive and it seems to make much sense as “longevity insurance”. On the other hand, the financial industry has a history of selling stuff that doesn’t live up to its promise, as you said. They have form in taking hidden risks, evading regulations, and when push comes to shove I think they have a stronger lobby than a few pensioners. The “funded reinsurance” bait-and-switch doesn’t inspire confidence: buy a claim from a stolid UK life insurer, get a private credit group on Bermuda.
Yes, though annuities are tried and tested with a long track record. Plus that 100% FSCS guarantee, implicitly backstopped by the State.
I don’t have a problem with annuities from that perspective. Not many governments are going to let the old and vulnerable go under. Just imagine the headlines :-0
The longevity insurance is what I’d buy it for. No way would I roll the dice on Alan’s 44% chance of one of us outliving the ladder.
Yes, those probabilities seemed convincing.
Obviously varies as linker prices vary, and with age….in fact a little spreadsheet comparing ladder with annuity might be a helpful thing! 😉
@TA – fair point. I might go for a split between an annuity and linker ladder for basic income. Plus keep an allocation to stocks that should outgrow inflation over the very long term.
A bit late for my comment (catching up on a rainy day in Ireland), but I would like to point out that you absolutely can buy retirement annuities from crystallised pension funds. In May my wife and I did exactly that using part of the funds from our Hargreaves Lansdown SIPPs. The SIPPs were fully crystallised years ago. If your pension provider will not allow this, move to a platform that will. No provider can stop you doing that.
IMHO index linked annuities are very good value at present. As 65 year olds we obtained single life annuities at rates over 5%. Far more than I am comfortable with in decumulation, even without today’s sky high equity valuations. You can even get RPI linked annuities with a 100% spouse pension at rates over 4.4%.
That said, I would not want to put all my eggs into annuity baskets. Guarantees are only as good as the guarantors…
One thing to watch for is that there is a post code lottery with annuities. Had we been living in the area I grew up in we would have got rates about 0.5% more than we did. The various tables only give the average rates you can expect. Something to bear in mind if you are thinking of moving around the time you buy an annuity.
I was late coming to this one – just worked through the article and comments and both interesting and informative. Taking it back to one of the simple options at the end of the article “buy the shortest duration index-linked bond fund hedged to GBP” and comments mentioning the iShares Up to 10 Years Index Linked Gilt Index and the Royal London Short Duration Global Index Linked Funds, did the abrdn Short Dated Global Inflation-Linked Bond Tracker Fund come onto anyone’s radar? Looks like contains global linkers under 10Y and average maturity around 4.5-5.5 Y ?