OMG my pension made money last year

setmefree2

I don't believe it but I actually made quite abit of money on my pension pot last year! I moved my money into UK gilts and cash (I think in March 2008) and I have made money on the gilts. Is this because the UK interest rate was quite high when I moved my funds into them and it's now low?

When should I think about moving out of gilts if I want to lock in the gain?

Thanks

SMF2

Tibbledom

Indeed. The outlook for the level of future interest rates has reduced over the last year. As gilts pay a fixed coupon (i.e. fixed percentage of the nominal amount of the gilt) then this fixed coupon is worth more than last year, and so a buyer of a gilt will be willing to pay more for it than this time last year and so the prices have gone up.

It is impossible to say when the best time to sell is - the market has placed expectations on what future interest rates will be and nobody knows whether these expectations are too optimistic or too pessimistic. Whether they are too pessimistic or optimistic determines whether gilts will go up or down in price in the coming months. Other factors such as the supply of gilts by the government do affect things also but the general principle still holds.

And if you holding onto the gilts you need to consider if the outstanding term is appropriate. If you are intending to retire in 5 years time there seems little point it having a 20 year outstanding gilt - to reduce risk a 5 year gilt would be appropriate in that circumstance.

It is worth looking at the gross redemption yields of your gilts. To me these gross redemption yields (which represents the return if gilts are held to their redemption date but ignoring the issue of reinvestment of the coupons) on short term gilts look quite low relative to the returns on cash funds so I personally don't think gilts are good value for the medium/long term relative to cash funds - don't know if others would agree. Obviously need to factor in issues of security into that as government gilts are pretty much risk free in terms of the payment of coupons.

setmefree2

Tibbledom - many many thanks for your response.

I have being doing some reading about bonds, correct me if I'm wrong but to get the timing right to sell I need to be looking at:-

1) Where UK inflation is going and hence interest rates - if inflation seems to be rising in the UK (maybe due to weak pound) then I need to sell
2) How well new issues of UK government bonds sell at auction. If the auctions go badly I "may" need to sell because Government yields may have to increase to sell their debt and the new bonds with the higher yields will look more "tasty" than previous bonds.
3) The stock market - if it looks like a bull market might return (LOL) investors might pile out of bonds into equities.
4) Quantitative easing - if the UK government start to buy UK bonds this will push the price up.

Is that it?

SMF2

Tibbledom

setmefree2 wrote: »

I have being doing some reading about bonds, correct me if I'm wrong but to get the timing right to sell I need to be looking at:-

1) Where UK inflation is going and hence interest rates - if inflation seems to be rising in the UK (maybe due to weak pound) then I need to sell
2) How well new issues of UK government bonds sell at auction. If the auctions go badly I "may" need to sell because Government yields may have to increase to sell their debt and the new bonds with the higher yields will look more "tasty" than previous bonds.
3) The stock market - if it looks like a bull market might return (LOL) investors might pile out of bonds into equities.
4) Quantitative easing - if the UK government start to buy UK bonds this will push the price up.

Is that it?

SMF2

I think that sums up the main factors affecting the gilts markets, although I don't claim any great expertise.

The main investors in gilts are the institutional investors (e.g. pension funds) so they are the ones who may be pushing down yields because they need to match their liabilities and so have to accept the lower returns.

The difficult thing as with shares is predicting that say inflation is starting to rise before the market also realises. By the time that the first signs of rising inflation have appeared it will have already been reflected by a fall in gilt prices and it is too late to act.

That said you’ve managed to predict things over the last year so who’s to say you won't switch out at the right time!

setmefree2

Tibbledom wrote: »

That said you’ve managed to predict things over the last year so who’s to say you won't switch out at the right time!

Dear me no - I made money by accident:rotfl:. I moved my pension to preserve capital and happened to make money almost by chance.
Now that I've got it however I'd like to keep hold of it :T

Thanks so much for your help.

Best Regards

SMF2

jamesd

You might consider a gradual switch into a mixture of non-AAA corporate bonds and index-linked gilts. Index-linked should gain when inflation goes up while the non-AAA corporate bonds seem to be pessimistically valued and may recover as the troubles finally start to end. AAA corporates are a bit too closely linked to gilts for me to fancy them.

At the moment you're probably in regular gilts and that's not a place I'd want to be, looking forward, though it was a good place to be over the last year.

setmefree2

jamesd wrote: »

At the moment you're probably in regular gilts and that's not a place I'd want to be, looking forward, though it was a good place to be over the last year.

Should I get out now or are there more gains to be had in the short or medium term?

jamesd

I'd be starting to get out now. You don't want to be part of a herd trying to get out at the same time as everyone else. Better to go a bit early. You can do it in pieces over 6-12 months though. That way you're in decent shape whenever things move.

Also remember that this is trying to predict the future at a really tough time. No warranty.