Just start
by Doug Brodie
/1. Gilt ladders – how they work, and the giant downside.
Think of a gilt as a fixed term deposit, you are depositing money with the government for a fixed term. To have a known income every year for the next ten years you invest in a one year deposit which will mature after twelve months and pay you the capital and interest to keep you going for a year, then you have the maturity of the two year deposit that’ll return to you the capital and interest again.
If you don’t need the income, you can reinvest the proceeds each year into a new term gilt, and in this way you walk your money up a ladder of gilts. The media gets excited about gilts because the capital gain on gilts (if any) is free from tax, however the majority of our clients hold income assets in pensions or ISAs or bonds, so that exemption is not relevant.
Key Advantages & Drawbacks
Advantages:
Reinvestment flexibility: Capture rising yields over time.
Predictable cash flows: Ideal for matching liabilities (e.g., school fees, pension drawdown).
Risk management: Spreads out interest-rate and reinvestment risk.
Drawbacks:
Moderate complexity: Requires periodic rebalancing and monitoring.
Lower upside: In strong bull markets for bonds, long-dated gilts may outperform a ladder.
Interest-rate risk on individual long maturities: While offset by staggering, the longest rung still carries rate-sensitivity.
If spent as income, the capital will eventually run out at the end of the longest term.
An example of a five year ladder:
Here’s the maturity scenario – the proceeds each year in the right hand column is the income the investor will have:
For an investment of £100,000 the total proceeds are £100,587; you’ll be unimpressed (so are we) - you can beat that handsomely with cash deposits. The main point is that it does provide an absolute known amount of money which is mainly used to match costs and liabilities that are fixed. For example, court awards for care are often invested in this way as catastrophic care costs are fairly predictable from year to year.
The biggest proponents of bond ladders are in the US – this is because they have an enormous bond market so it can be quite profitable to create a ladder using bonds from different companies instead of gilts. For example, the energy (oil) company Enquest has a bond in issue: ENQLN 9 10/27/27 which has a yield to maturity in 2027 of 8.75%. That might meet your needs in terms of yield, however it was issued at 500,000 nominal (basically lumps of £500,000) so you’ll be unlikely to be able to buy at less than circa £500k – plus you’ll have to be happy with your due diligence of this oil energy provider. (Note: we have followed Enquest for the last decade, it’s something we know we do NOT recommend being highly, highly speculative, hence the high yield at twice base rate).
Buying your income upfront
We can reverse engineer a gilt ladder to provide a known income each year and we can do that using inflation-linked gilts; if you want £25,000 of annual income growing at RPI of 3% each year for ten years it’ll cost you £244,102 at this morning’s gilt prices:
The annual income will be (£25,000 x 1.03^1-10), so in year ten it will be £33,597, and the total return for all ten years will be £295,194.
The downside.
Don’t get sidetracked by the ability to turn £244,102 into £25,000 per year (+ inflation). At the end of the ten year ladder the income stops and all your capital is gone. For lifetime income, such ladders only really become applicable for large portfolios of over several £million – this is because a ladder allows income to be specified in the short term leaving the balance of the portfolio to be placed for longer term growth, taking income from that pot after year ten.
/2. Did you beat the market?
The MSCI World has an annualised return over the last five years of 13.8% which is almost 30% below last year’s return of 19.19%. However the MSCI was beaten handsomely by Singapore’s market at 32.56%, and that was only half what Pakistan’s market did at 76.71%.
If you need income for your retirement this is a red herring, and to be honest, by the time most folk reach retirement age they know that ‘beating the market’ is a pleonasm – “a word or phrase which is useless, clichéd or repetitive”.
Jason Zweig of the WSJ writes:
“Did you 'beat the market'? Who cares? Why would that be important? A much better question is 'Did you do what you needed to do?' Understanding your level of risk relative to the market is important but getting folks to focus on what they need to do is probably much more important.
(Note from Jason: This reminds me of something I wrote long ago. Interviewing wealthy retirees in Boca Raton, Fla., I asked if they'd beaten the market over their investing lifetimes. Some said yes, some said no. Then one man said, “Who cares? All I know is, my investments earned enough for me to end up in Boca.”)”
/3. Is your income increasing or decreasing? Know the right question to ask.
“Do you like cricket?”, and “Could you happily read Wisden for an hour?” – just because you like watching Test Match Special once a year, or you are happy to help out at the village green for the local derby, doesn’t mean you could joyfully sit reading statistics from matches far and wide in the modern – or vintage – Wisden. If you want to know if someone’s a cricket nut you have to ask the right question.
If your income grew last year, was that something that you only discovered when you looked back at the income you received? What tends to be more important to folk is knowing what income is going to be received this year … and next …. What creates anxiety is being unsure of what future income is going to be received. That’s what we do.
If knowing what this year’s income is going to be is more of a worry than what next year’s income will be, that probably means you’re a tad light on your cash reserve. You should be very confident that your income for this year will be paid irrespective of whatever happens in the news, and you should have comfort that while one year might be out of kilter (think 2020), inflation will be seen off over the longer term.
Have you noticed? The media commentators always talk about the dire risk of inflation destroying the value of the £ in your pocket over time, yet they quote the inflation today, for this month, for this year. Why don’t they quote the rolling 5 year figures, or the long term 20 year figures?
As one writer said:
“Is the income your portfolio will generate increasing or decreasing? I retired 12 years ago and had to rely on income I could generate through earnings off my savings. As time went on I realized how important that number is. By living a bit below my means it gives tremendous freedom - freedom to do what you want to do and freedom to not worry about market gyrations. Even in the recent volatility I found I was able to increase my annual income slightly. Focusing on total returns and/or capital gains really doesn't tell you everything you need to know.”
/4. Sweden – flat pack pensions, really.
When it comes to Sweden’s public pension, two clever guardrails keep the whole thing solvent for the long haul: a life-expectancy taper and an automatic “brake.”
Your Swedish State Pension Income Isn’t a Flat Cheque:
1. Every year you work, 18.5 % of your pay gets logged into a notional account (16% for the pay-as-you-go Income Pension; 2.5% for the funded Premium Pension).
2. Rather than cost inflation, your pot grows in line with wage trends—so it always reflects what people are earning today.
3. When you retire, that pot is sliced into an annual cheque using a divisor based on how long someone your age is expected to live. More on that next.
Delningstal: The Life-Expectancy Lever
4. Think of the divisor as “years still to go.” The longer Swedes live, the more years the scheme needs to pay out—and so the smaller each instalment becomes. If average longevity ticks up, your annual payment eases back, spreading the same capital over more years.
5. Retire later? You’ve got fewer years left on paper—so the divisor shrinks and your monthly cheque fattens up.
Flex the Age, Flex the Pay
6. You can start drawing your State Pension from 63 (recently lifted from 62),or wait as long as you like. Each year you hold off does two things: bulks up your notional pot (more contributions) and tightens the divisor (less time to spread your cash).
7. The result is a noticeably larger pension for every year you delay.
The “Brake” That Keeps It All on Track
Sweden constantly checks its books. If projected pensions outstrip future contributions plus the buffer fund, the system automatically applies a gentler index than wages.
In plain English, benefit growth slows—or even dips—until the maths lines up again.
After 2008’s meltdown, the brake kicked in from 2010 to 2018. No tax hikes. No borrowed billions. Just a temporary pause on pension increases—and the system emerged healthier for it.
Between the divisor and the brake, Sweden’s pension scheme passes its risk around equally—whether lifespans stretch further or markets get rocky—so today’s earners don’t get stuck footing tomorrow’s bill.
