The current price is £67.17 and the running yield today is 0.0196 per cent.
There is no point doing the maths. Purchasing an index-linked gilt for an individual is simply not feasible. The base yield is just too low to be a rational decision, even though that income is then guaranteed to keep pace with inflation.
This is why we believe guarantees may well not be necessary.
Possible, but not probable.
Our normal hobby horse for demonstrations is F&C (founded in 1868), so let us look at Bankers Trust, five years younger starting in just 1888. This shows the dividend from 1993 (30 years ago, the length of a common retirement), which is then increased every year by RPI – ie it is inflation linked.
The orange line is the 1993 dividend inflation linked, the blue line is the actual dividend paid, and you can see that RPI linking was not necessary. This was not a one off, our research has shown this is a very common case with well reserved and diversified investment trusts.
If we compare this to an RPI-linked annuity, the annual income after 30 years is 55 per cent higher than the annuity and you also have retained 100 per cent of your capital.
From an advisory perspective, it is quite clear that the price of covering off that ultimate ‘possibility’ is well outpaced by the option of the ‘probability’ – ie guaranteed index-linked income is ridiculously expensive and very poor value unless it is absolutely needed.
Doug Brodie is chief executive of Chancery Lane Income Planners
