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Hi @TA,
Most excellent dude! And very timely as I need to construct a short ladder from March until my pensions kick in, about 8 years. Then my essentials (wine, coffee, football season ticket & beers) after that. My pensions should cover the food and utilities comfortably and the global stock market will determine the sorts of holidays we get. Sorted!
Good article thanks.
I bought an IL gilt for my wife but deliberately put it into a general investment account rather than her ISA on the basis that the gilt is free of cg tax ( an issue which is of increasing important given recent budgets) and the running yield isn’t that high for the amount involved so freeing up funds in the ISA for more income.
Also, using halifax online share dealing, their Web page only shows clean prices which is a nuisance and it looks like a 50% loss on the investment amount. Telephone only dealing with them.
Incidentally, for IL I thought the clean price also excluded the inflation uplift on the principal ?
Fun, and a good exercise, thank you. Couple of thoughts:
As Paul-a38 says, inflation uplifts the principal aswell as the coupons, which is the main driver of the CP-DP spread (inflation uplifted coupons of 0.125% are still miniscule).
Sounds like you’re leading into it, but per Roth/Rekenthaler, a ladder is great until you outlive it and you’ve nothing left. So great to combine a ladder with a world tracker or similar, to cater for the longevity risk, https://www.etf.com/sections/features/allan-roth-how-beat-inflation-handily-risk-free. Or even to use it as part of a broader portfolio?
The lower coupon Gilts are very tax efficient. Building a ladder only out of these means you can build it in a GIA, freeing up ISA/SIPP for shares etc. This will mean bigger gaps in your ladder, but you can overweight the adjacent low coupon Gilts to compensate. Not as perfect mathematically, but cheaper. Definitely worth looking at if the ladder is part of a broader investment portfolio (rather than a quasi-annuity).
Is it a risk that future governments might change the tax treatment of individuals holding government debt? Apparently Nigel Lawson made them capital gains tax-free at a time when that change *made* the government money (yields had shot up, so gilts prices were down, so selling would have created a loss, which until Lawson could have been offset against other capital gains). Asking for a friend!
Interested in the collective views of how much of one’s anticipated future income needs people think of providing via linkers.
To me if I think of future expenses in 3 pots of essential, lifestyle and discretionary then it feels derisking essential would be a sensible target. The question to me is what proportion of lifestyle to consider derisking. Over a hopefully longish period between retirement and croaking I feel that equities should continue to do the heavy lifting on discretionary at least.
Maybe the answer as with most things is diversification so some but not all linkers is a defensible strategy. But as setting up and buying is a non trivial exercise it at least ought to be material to one’s future.
What an amazingly helpful article – and thank you TA for constructing the Monevator spreadsheet to accompany it. I had previously followed Wade Pfau’s work on this subject and had formed the conclusion that it was much more difficult for us in the UK because of a supposed lack of linkers here. Although, you identify some gaps in years, the set is much more complete than I had imagined it to be. It is a very neat feature to introduce the weighting factor to account for differences in payout months across the years. I look forward to the subsequent articles in this series.
@ BBBobbins – I think I’d want a portfolio that can cover the balance of my expenses (after deducting the guaranteed inflation-adjusted income part) with an SWR of around 3%. Ideally the SWR would be less than that, but I’d be comfortable at 3%. State Pension included in guaranteed income and house equity held in reserve.
@ DavidV – Yes, the linker market chains together more neatly than I thought too. I first looked into it nearly a decade ago and there seemed to be yawning gaps – at least in terms of what brokers were offering back then.
@ Vroom – I hadn’t heard about that Lawson manoeuvre before. Cunning. Without question, we must factor in some political risk which is another reason why I wouldn’t want to go 100% all in on linkers. If the credibility of the British State threatened the solvency of the British State then there’s only going to be one winner.
@ Paul – Thanks for the heads up about Halifax. Do they offer the complete list of linkers? I haven’t heard about any broker that shows dirty prices. HL – online trading. AJ Bell – telephone dealing only but at the normal online dealing cost. Fidelity don’t offer gilt trading. Interactive Investor and Saxo offer gilts, not sure if telephone only.
I bought some indexlinkers through interactive investor. Telephone only and long-winded. They show the difference between clean and dirty prices as accrued interest. You then have to contact them to get a separate message/document giving the breakdown between capital uplift and “actual” accrued interest.
@TA. At Halifax you get shunted to a special desk and we had done a bit of research as to which issue we wanted ( trying to address liquidity too). There was no push back so my feeling is they will buy what you want. II and HL offer some gilts online but I think it’s a limited selection. No doubt a phone call will get you what you want.
On Halifax, they gave always been very good, and prompt, at adding funds they don’t offer ( eg the odd low cost tracker identified by Monevator 🙂 )
Thanks TA! And @helfordpirate !
I’ve read Pfau’s articles on link ladders but thought there were too few UK linkers to make it practical here. Amazing the coverage is pretty good.
I’m fretting about annuities at the moment. I suspect you will look at how link ladders compare to annuities at some point in the series. I guess the main thing is with an annuity you potentially don’t have to unplug yourself from your iron lung in your late 90s to go online to order a few more years’ worth of ILGs. Oh, plus of course there is no mortality bonus, or whatever it’s called. OTOH even if you are youngish you get the same stream of reddies as oldies do. I suspect there is some cross-over age where annuities are the route to go down, but I dunno. I’ll have another look at Wade Pfau on this.
What I’d really like is a tontine. Apparently Royal Mail is doing something close to this with “the UK’s first collective defined contribution (CDC) scheme “. There seems to be quite a lot of academic and industry interest in these instruments, but I guess it will be more relevant to my grandchildren than me, judging by the speed that anything happens with government regulation of pensions. Which reminds me – time to head off to pick the little monkeys up,
@IEH
Hi, what are the differences and pros/cons v an annuity?
I recently set up a 12-year GILT ladder (just before this excellent article emerged) in a General Investment Account (cognisant of the fact that GILTS are CGT-free). My strategy is to provide a near-guaranteed 12-year retirement income, allowing me to leave my equities untouched (hopefully growing in the meantime). I wanted low coupons because they’re taxable and there are certainly more gaps with this method. So, I filled the gaps using conventional GILTS, ending up 50/50 (I suppose it could be considered diversification). My theory is: if inflation is high, the IL GILTS work best, but if inflation is low, conventional GILTS are probably better. I used AJ Bell without any issues. I could have used Interactive Investor, but that’s where my equities are, so I opted for some broker diversification.
@TA Excellent article and not a subject I could find investigated elsewhere for the UK. As you know I used HelfordPirate’s spreadsheet and then I created a very basic spreadsheet to try and get cash dumps within 12 months of April year end. I think I’ve got there, but this was the hardest part of the exercise.
@BBBobbins. Good question. Probability v Safety First or a mix of both retirement strategies. I’ve worked from Bernsteins statement of deaccumulation being about ensuring not retiring poor rather than getting richer. Of real importance to me was also needing something that would drop cash in an account that could be withdrawn at set dates if I permanently tap out into the other dimension. So I started from our current family yearly spend and then forecast out state pensions and any other guranteed inflation proof income. After that, I pepper potted linkers out to 30 yrs, which I haven’t quite finished yet (Bernstein recommends 25yrs, but starting at 65yrs I think.) My thinking is that I’ve taken out Sequence Risk whilst maintaining income during the go-go years at the expense of a chnace of getting richer. I’ve also got long duration gilts with a dash of cash to bring the duration to 15 yrs as a proxy for buying an annuity at 65 ish (56 now). With a 66% spouse guarantee this gives some longevity insurance. To be honest I’m working on an assumption that delaying buying an annuity for 9yrs (with the above proxy) will buy me more income, but there’s a risk of I don’t know what I don’t know with this.
Finally, I’ve got a bit left for risky assets and I’m looking at TI’s Investment Trust article for that one +Global tracker. This won’t be needed for 30 yrs+ hopefully, but there if I do.
So I did the calcs on all that and this works out as 50% linkers, 26% Annuity, 9% Cash and 15% Risk Assets (all excluding cash for eventual house purchase).
So I’ve probably addressed it differently to TA and was quite surprised when I did the % clacs following your query. Hope it helps…
Thanks for the absolutely brilliant article & for the immense amount of research & work which has evidently gone into it. 🙂 You have done an amazing job @TA of simplifying & explaining a v. difficult subject which, without the benefit of your v. clear & engaging guidance, would potentially be baffling enough to give an aspirin a headache.
One thought on interpolation for missing years’ linkers. Would it be preferable to buy more of the year before the missing year, rather than splitting the difference between that year & the year after the missing one, because – in practice – it’s likely that the inflation risk for 1 year is less than the price risk of buying the next year linker after the missing year & them having to sell some of it pre-redemption to cover the missing year, potentially at a loss?
Terrific post but perhaps too late and too complicated for little old me(77)
I also not entirely happy on totally relying on the U.K. government financially for what is a large part of my portfolio -currently 33/62/5-equities/bonds/cash
The principle of global investment for me also applies to bonds as well as equities -a global linkers ladder?
I did construct a rolling 5 year gilt ladder many years ago which did the job but needed continuous attention and was U.K. based only
I have used one global bond index fund hedged to the pound only successfully for many years now (last years unusual drop seems to be unwinding) for the bond part of my portfolio
It will interesting to see how the index linked bond scene evolves or is it just a passing knee jerk reaction to current inflation and interest rates
xxd09
Hi @Boltt #10
Do you mean differences of tontines vs. annuities? Have a search for “modern tontine with bequest” on google scholar and read the top result by T Bernhardt, C Donnelly.
“… participants in modern tontines can have a better financial outcome than can be achieved through life annuities. The tontine participants avoid the expensive, decades-long guarantees inherent in conventional life annuities. In doing so, they can achieve a higher expected income in return for accepting more risk in the level and duration of their tontine-derived income.
Participants should also have a better financial outcome while alive than those in income drawdown, …”
Unfortunately there aren’t any tontines available in the UK, nor likely to be in the forseable. There are in the US, Canada and Australia, apparently, but I’ve no whether they are true tontines or not.
Thanks all!
@ TLI – I’m inclined to tilt more in favour of buying the year before than the year after. Do you have a sense of the volatility of a 1-yr linker? That said, I’ve just taken a look at the 2022 total return of the FTSE UK Index-Linked Gilts up to 5y index. I was astonished to see it was up 4%.
@TA Forgot to add that when I purchased the linkers I was able to quote the Epic code i.e. TR26 etc rather than the ISIN code. Both II and HL repeat back ‘1/8th% index linked treasury gilt 2026’ etc so that there is no confusion, but I found this easier than quoting the ISIN. Also Helfordpirate sheet quotes numbers in ‘whole gilts’ i.e. 67, so I needed to ask for 6,700. I would like to thank HelfordPirate for producing this work. It really has been useful …
@ Sleepingdogs – thank you, all useful detail. The EPIC code certainly saves a lot of time and potential confusion vs the ISIN. Last I checked, Helford has now updated his spreadsheet so it does fractional gilt units now too.
Hi @TA#16: I haven’t (yet) managed to find historical volatility data isolated to 1 year ILG maturities, but the BIS have done a nice survey of volatility profiles for UK asset classes (including gilts) from 1946 to 1995 here:
https://www.bis.org/publ/confp01u.pdf
Figure 5 in the Appendix and table 4 in the main body of text seem the most relevant.
Unfortunately linkers only start in around 1981, IIRC.
I vaguely recall ZX indicating once that, as a very generalised rule of thumb, most asset classes typically have about 1 unit of volatility per unit time for ever 0.5 units of nominal returns over the same unit time.
Thanks for a fantastic article. Having sold my index linked gilt fund quite a few years ago at just the right time after reading one of your columns I am extremely grateful to Monevator.
I had already been thinking about buying a ladder as you describe to help fund my retirement but I have one question. Despite all the useful information in the article and the resources I can’t find any source that quotes the real yield on linkers. From various articles I can see that a few years ago it was aroung -3% and now it 0.65% but I can’t find real time data.
Hi @Adrian Steele #20: try ‘Tradeweb FTSE Gilt & EuroGov Closing Prices’, then under the drop down ‘Securities Type’ menu select ‘Index-linked’ & click on ‘Submit’. You will need to create a Tradeweb account 1st, but it’s free. The yield column on the table for the linkers is a real yield. It’s slightly comedically calculated to seven significant figures. A word of warning: the Tradeweb site is, in my experience, perhaps a bit on the slow side to load/respond & a little crash prone, the user interface looks like a webpage from circa 1995 & quoted real yields for any linker maturing within a year’s time is an annualised equivalent rate. This is why the March 2024 linker looks to have a much higher yield than anything else. Apart from that one, the highest real yield today looks to be 1.205691% for the 22nd March 2050 maturity linker. In October we got up to ~1.6% on the 30 year range ones.
@ timeline infinity – just managed to find the yield column – fantastic thank you
Thanks very much for this article. I am excited about what I might do with it. I have downloaded the Monevator spreadsheet as an Excel file but am getting some odd behaviour from it, including a circular reference warning and cells not updating correctly when I change them. I have never downloaded from a google spreadsheet to Excel before. Am I ill advised to do that?
@Russss – in theory there should be no risk (e.g. viruses) to download a Google spreadsheet to Excel, but wouldn’t it be easier just to use it natively e.g. as a Google spreadsheet?
With the circular reference warning, you should be able to go to the Excel settings (somewhere!) and allow circular references to resolve. Then the warnings disappear and it’ll work OK.
HTH.
@Brod – thanks. That suggestion has fixed the odd behaviour I was seeing with Excel.
Just realised I had forgotten to say thank you for these tools. Both downloaded and I will have a play in the new year. Great timing as we intend to finally make up our minds about annuities in January. Several months ago I built a ladder of linkers in a spreadsheet and found that for us, index linked annuities had an income edge compared to 30y ladders. Income is not the whole story of course. Giving up capital reduces flexibility compared to running down capital, ladders don’t provide longevity insurance, etc.
One annoying thing with annuities is the commission. I have not found a way to avoid this and the lowest comes in at around 1%. The best quotes for us came from Just and L&G and neither want direct execution only business. If anyone knows how to reduce commission below 1%, please let me know.
Anyway, both spreadsheets are better automated than mine, so thanks again.
Amazing resources: thank you so much.
I don’t know if this is now too late to pose a question as the article is not the newest, but I am very new to all this – however, I have bought several different quantities of several different editions of gilts in recent times, a sort of intuition without understanding the numbers (others break out in cold sweat as they read that…).
What is my best way to use the spreadsheet? struggling to understand how to properly put my existing rungs into the spreadsheet….
thank you if anyone could advise.
Thanks again for the great article, links, spread sheets 🙂
I’ve recently liquidated my business and created a linker ladder with the proceeds of the liquidation. This article and spreadsheets, and the comments, have been invaluable so thank you. I have a small DB and fairly large DC pension but I’m keen not to draw on the latter until as late in life as possible. So I was looking at using the liquidation funds to meet a good slug of income needs for 20+ years from my early 60s to 80s. When I told various financial advisers ‘I’m looking for a near to risk free option that simply keeps pace with inflation’, they told me no such option exists and recommended investment bonds or other traditional (high fee and higher risk!) options. Thanks to my Monevator friends, I’ve been able to construct a 21 year DIY linker ladder, utilising 13 gilts from TR26 to TR46, and will simply await the government’s repayment at the end of each term. I’ve avoided those with coupons over 0.75% because I’m a 40% tax payer, and will have to sell half of several gilts a year early to smooth the cash flow. Given that my intention is entirely defensive (to match inflation) I’m delighted to say that at the prices I achieved this week the ladder as a whole has a real yield of 0.9%. I have an account with ii and used that – the process involved a single (long!) telephone call, and each gilt was bought for a fee of only £3.99 (worth noting that any purchase over £100k of a single gilt incurs a £40 fee). Very happy to provide more info if helpful to others.
Hi Mark, I’m thinking of buying index-linked gilts for a 10 year period – would you mind sharing more details of your analysis and YTM assessment of your ladder’s proposed gilts to feed into your decision making process please?
@ Wildlife – I’m not sure what’s tripping you up… feel free to ask some specific questions that aren’t covered in the article and maybe I can help. Or is the problem you’re missing data such as your original buying prices etc?
@ Mark D – I’m very happy this article helped, especially after all those financial advisors failed to come through for you.
What info did the ii people need from you to make each purchase? I’m planning a post to demystify the process of actually purchasing linkers, so this would be great to know and marry up with my own experience.
Thanks for the info. @Mark D – v. useful and much appreciated.
@TA: A post demystifying the process of buying from the platforms would be great and super kind to those of us, like me, who are still a bit overawed at the thought of screwing up implementing the ILG ladder in practice.
FWIW:
– HL seem to have quite high fees for secondary market ILG transactions at 1%, with min £20 and max (capped) £50. So that means to get it down to something a little more reasonable (say 0.25-0.5%) then you’re taking about £10-20k purchase per single gilt.
– ii sounds good at £3.99 and, if I read their T&Cs right, I think AJB are £4.99 per transaction, but I’m not sure if there’s a higher rate tier, like there is with ii imposing a £40 fee for purchases and sales over £100k.
Also be interested to know which fund platforms use the best order execution mechanism – I vaguely recall (but can’t immediately locate) a comment on a different thread from ZX that there was, in effect, a retail gilt ‘platform’ and also a wholesale one (sorry if I misremember this) and whichever broker one used then you’d want to make sure that they executed the order over the wholesale one. Be good to get some more details on this, if possible please.
Thank you again for the excellent piece @TA and my thanks also to the various commenters for their useful further info.
@ Delta Hedge – you can buy linkers online at HL so you just pay their normal £11.95 rate per transaction, not the telephone charge.
I don’t think you get a choice of which platform you purchase on, though I could be wrong, or perhaps one of the trading platforms provides it.
Either way I doubt it’s going to make a material difference if you’re holding your linkers for years.
@TA I called ii and explained I wanted to buy a series of index linked gilts. Then I gave them the short-form EPIC code for the first one (eg TR26), they read out the details of coupon, maturity date and ISIN to make sure we were talking about the same gilt, and asked whether I wanted to buy a number of units or buy units to a set value. They then quoted an indicative clean and dirty price and the £3.99 fee and the accrued interest to add on, and when I confirmed I wanted to go ahead, we moved to the next on the list. It took about 45 mins to go through all 13 at which point he put me on hold and went to his trading team to put the trades through which took about 45 mins more. Then he came back and simply ran through them all at the actual bought prices. In all cases the price they’d negotiated was slightly better (from my perspective) than the illustrative price and v similar to the tradeweb/yieldgimp data.
Happy to share more of the background and experience if it would be useful for your follow up post – just contact me.
@Mark D – thanks for describing your process which is very useful as I have an II account too. Would you mind elaborating on whether there was a timing aspect to when you actually initiated these orders?
What I’m trying to get a handle on is whether YTM calculations can really be relied upon for the gilt-ladder especially as buys/sells are always on the secondary market, and therefore vary, and/or whether one “just” works on the basis of a investment being made in gilts with an expectation for a fixed (but index-linked) gilt amount being withdrawn per annum, and the spreadsheet used to identify which gilts need to be ordered to cover the relevant years of the ladder. All feedback welcome.
@Stuart C – I didn’t worry too much about YTM. I’d already decided that this was the road I wanted to go down and that I wanted a steady ‘fixed’ flow of cash annually and chose the gilts that best smoothed the path to maturity. The spreadsheet was then very helpful in working out how many gilts i would require and the Tradeweb and yieldgimp data helped me identify likely cost.
@Mark D – Thanks for your thoughts. What’s unclear to me is how to use YTM to assess if the overall investment could be loss-making especially if some gilts at time of purchase are trading above par value. I appreciate that holding gilts to maturity guarantees receipt of coupons and their par-value (+RPI increase) but if interest rates end up being lower than expected during the period, does that not risk a “loss” or much lower return compared with a global index tracker?
@TA #32: I’ve now had a reply from HL on my request for them to clarify which bonds – conventional and index linked – they charge £11.95 to trade via their website and which can only be traded over the phone for £20 to £50 a go. So, any bonds listed on HL’s website with a green box and rightward pointing white arrow can be brought online and anything else is phone only (and shows as greyed out online). Looking at the 3 pages of bonds HL list it looks like nearly all conventional bonds can be brought or sold for £11.95 online but with 3 random exceptions all index linked bonds can only be traded over the phone at £20 to £50 a pop. HL must hate me. I’m constantly asking them questions. 😉
@Delta Hedge (37)
The only three index-linked bonds you can buy online with HL are the three which have an eight-month indexation time lag (all the others have a three-month indexation lag). Not entirely random, but near enough.
Anyone had a play with this gilt ladder web app [1]? I found it on /r/fireuk recently.
[1]: https://lategenxer.streamlit.app/Gilt_Ladder