A UK retiree who wants an income that keeps up with prices has two ways to lock it in. One is a ladder of index-linked gilts, one maturing each year. The other is an inflation-linked annuity (an income bought from an insurer that rises with prices and pays for life). It can be treated as two prices for the same spending, a year of it: one paid whether or not the person is alive, the other only while they are. Priced year by year, the two prices cross at an age.
The Question Is Usually Argued by Features
Forum threads on this question tend to run the same way. The ladder keeps the money yours, leaves something to heirs and can be sold. The annuity pays for as long as you live, however long that is, and cannot be outlived. Both lists are true. The comparison is less often made year by year, on one curve and one life table.
This essay prices one plan both ways, on the same curve and the same life table, so the two can be compared in pounds.
The plan belongs to a single person, aged 62, who has stopped work and spends £50,000 a year after tax. The full new State Pension, £12,548 a year, starts at 67 on 35 qualifying years. Savings are £1,300,000. The plan runs to 95, the calculator's end age. Prices are the UK index-linked gilt curve of 2 November 2026, which put real yields at 1.93% for ten years, 2.47% for twenty and 2.33% for thirty.
What a Gilt Ladder Buys
A ladder pays for every year in full. The gilt that matures when the holder is 80 pays at 80 whether or not they are alive to spend it, so the ladder prices every year as if the person will live to the end of the plan.
Priced that way, the plan's spending to 95 costs £1,183,000 today. The State Pension it will receive is worth £235,000 on the same basis, so the savings have to cover £948,000. At £1,300,000, the plan is 137% funded on this basis.
One feature of this curve is worth knowing. Real yields below about a year are negative, so the nearest years cost slightly more than a pound today for each pound of spending. Further out, a year of spending costs well under a pound, and about half a pound by the early nineties.
Price your own plan on today's curve, and the result shows all three of the costs described here.
What an Annuity Buys
A pool pays only while the person is alive. The years a member does not live to see are paid to the members who do, which is why a pool can charge less than a ladder for the same income while alive. Economists call that transfer the mortality credit. Menahem Yaari showed in 1965 that, in a model where annuities are sold at a fair price and the person has no wish to leave money behind, holding all wealth in them maximizes expected lifetime utility. The next paragraph says why no market meets the first condition.
Priced as a fair pool would price it, with each year weighted by the odds of being alive to spend it, the same plan costs £918,000 and the State Pension is worth £170,000. The savings have to cover £748,000, and the plan is 174% funded. That is the headline ratio on the calculator.
No insurer sells at the fair price. A quote costs more than the fair value of what it pays, and the fair value divided by the price is the annuity's money's worth. A money's worth of 90% means paying £1 for every 90p of fair value.
So the result's three costs are three answers to one question. The weighted cost is what a fair pool would charge. The outright cost is what gilts would charge for every year in full. The third, the cost of locking the plan in today, is the outright cost built from gilts that are actually on issue, which mature on their own dates rather than on the person's birthdays, with this year's spending kept as cash.
Year by Year, Where the Two Prices Cross
Each year of the plan can be paid by a gilt or by a share of an annuity. A year costs less from the annuity exactly when the odds of being alive to need it are below the annuity's money's worth. The odds fall with age and the money's worth does not, so the gilt's price is lower for the early years and the pool's for the later ones, and the two cross once.
For this plan, from next year on, gilts alone cost £898,000. Here is the split with the lowest total cost at five money's worths, each an annuity that rises with prices and is bought today to pay from the age shown. Gilts and annuity are each to the nearest £1,000, and the total and the difference are worked from those rounded figures, so the rows add up on the page. The last column is the difference against gilts alone:
| Money's worth | Annuity from | Gilts | Annuity | Total | Less than gilts alone |
|---|---|---|---|---|---|
| 80% | 78 | £536,000 | £253,000 | £789,000 | £109,000 |
| 85% | 75 | £453,000 | £318,000 | £771,000 | £127,000 |
| 90% | 72 | £363,000 | £389,000 | £752,000 | £146,000 |
| 95% | 68 | £231,000 | £498,000 | £729,000 | £169,000 |
| Fair | 63 | £0 | £698,000 | £698,000 | £200,000 |
No insurer sells at the fair price (above), so that row is a bound, not a quote.
The start ages follow the odds. On the national tables this person has a 79% chance of being alive at 78, so at a money's worth of 80% the pool's price for that year, and every year after it, is below the gilt's. At 90% the change comes at 72, where the odds first fall below 90%.
The comparison then has a measurable form: at a given money's worth, the age from which the annuity's price for a year falls below the gilt's. That age can be read off once a quote's money's worth is known.
Past the End Age
The plan stops at 95. The person may not. On the same tables the chance of being alive at 95 is 19%.
Paying for the five years from 95 to 100 with gilts would cost another £95,000 today, because a gilt pays whether or not anyone is alive to collect. A fair pool would charge £11,000 for the same five years, because it pays only where someone is alive to collect, and at those ages that is fewer than one in five. The gap is widest exactly where the odds are lowest, which is the same rule seen from the far end.
A life annuity keeps paying past 95. Those years are not in the plan above, so a quote for a life annuity buys somewhat more than the table counts. The other side is not counted either: gilts that have not matured at death pass to heirs.
What the Comparison Leaves Out
One life only. The split is priced for a single person. A joint-life annuity for a couple pays on the second death, and this essay does not price it. The site's own table prices one person only as well.
The odds are the nation's. The money's worth here is measured on the national tables. Insurers price on the odds of people who buy annuities, who live longer than the population, so a quote's money's worth measured on the national tables is lower than on the insurer's own, and a lower money's worth puts each start age later.
Many annuities start now. Many annuities on sale start paying at once, and many pay a fixed amount. The table prices one bought today to start later and rise with prices.
An annuity cannot be undone. Once bought it cannot be sold, it leaves nothing to heirs, and it depends on the insurer that wrote it. A gilt can be sold and passes to heirs, and it depends on the government that issued it.
The money's worth is not known here. It is the fair value of what a quote pays divided by its price, and the fair value is the quote's income priced on the national tables and today's gilt curve. The table shows five values and does not say which any insurer offers, and it takes no quote of its own.
Tax is left out. The spending is stated after tax, but the figures take no tax off what is drawn from savings or paid by an annuity, and a SIPP and an ISA are taxed differently on the way out.
Other pensions. The State Pension is netted off the spending. A workplace pension nets off in the same way, and this example has none.
The Premium ladder page prints this table for one person whose spending and income are in one currency.
What This Does Not Say
This does not recommend gilts, an annuity or any mix of the two, and no row in the table is the right one. It names no insurer and no gilt. It is a price at five money's worths for one stated plan on one dated curve.
What it does say is narrower. The ladder against annuity question has a price, the price changes year by year, and the age at which the cheaper one changes can be measured once a quote's money's worth is known.
A gilt ladder pays for every year as if the person will live to see it. A pool pays only for the years they do, and charges a margin for the service. Put the two prices side by side, year by year, and the price side of the choice becomes an age that depends on one number in a quote. Control, heirs and irreversibility are not in that number, and remain the reader's to weigh.
Measure yours with the funded ratio calculator.
This is Post 16 of The Funded Ratio — a series on amifunded.com applying actuarial principles to individual retirement portfolios. Built on Yaari (1965) on annuities under an uncertain lifetime, the market prices of index-linked gilts, and the ONS National Life Tables for the UK projected on the ONS 2024-based national population projections. No financial advice is given. All methods use publicly available academic research and market data.