AshleyW wrote:Tax is an important consideration as a gilt ladder will normally be lower taxed than an annuity but the annuity does provide protection against outliving your investments.
Buy a annuity and die next year and you wont care that you 'missed out'. Live to 100 and then find that they can extend your life by another 10 years, get to 110 and find they can add another 10 years ...etc. and you'll be glad you'd bought a annuity. Conceptually should pay out less each year than a index linked ladder. But a annuity will also typically involve a third party - who likely hedges their exposure by buying Index Linked Gilts. If a breakthrough suddenly added 50 years to typical lifetimes, many of those third parties might very well throw in the towel (declare bankruptcy).
Index linked gilts are point to point, guaranteed (fixed) known return between those two dates. Build a ladder spanning many years and that's more aligned with where you average into and out of stocks over many years, has a overall broad average total reward, but where stocks are inclined to provide the higher return of the two.
Typically stock, house, gold ...etc prices advance at a 2% higher rate that CPI (that is slowed by productivity), stocks additionally pay dividends - historically at around a 4.5% yield rate. On average a combined 6.5% more than CPI. Even if you secure inflation + 2% real rates from ILG that's still 4.5% less than stocks. Averaging into and out of stocks over many years is inclined to average the broader average, some purchase/sales at lows, and highs. Yet another form of averaging in addition to time averaging is a stock/bond (or stock/gold) blend and periodic rebalancing that tends to 'trade' in a add-low/reduce-high manner form of 'averaging'. The 'average' is 'good'. Many investors don't even achieve the 'average' (after costs/taxes and poor decisions). Some end up worse than had they just maintained a cash deposit account.
67/33 stock/gold foregoes 1/3rd of the dividends that might otherwise have been achieved, but lowers the volatility. Two thirds of 6.5% (all-stock expected real) = 4.4%. Still more than ILG's whilst being more consistent/certain (less volatile). Worst case will be better (higher than 4% SWR historic general measure), average case will leave less than if you'd been all in stocks - but still typically a very decent amount, and where during interim high volatility periods the portfolio volatility will be lower. Whatever might drive 67 in stocks halve might equally see 33 in gold double. No loss, and where rebalancing back to 67/33 has you holding twice as many shares after stock prices had halved (Martingale/d'Alembert betting sequence style, but with conceptual unlimited bank-roll (iterations)).