Gilts - my unanticipated nightmare

valiant24

My SIPP is quite close to the LTE.  After discussion with my accountant I decided to put all of this into gilts, as the upside - taxed at 55% - would be way less than the downside.

Well, since doing this about 3 months ago, my SIPP has dropped by about 3%!   The worst has been Vanguard U.K. Gilt UCITS ETF (VGOV), which has lost about 3.5% of its value in the period.

Absolutely not what I was expecting, from a supposedly non-volatile investment.   No use crying over spilt milk, but my questions are two-fold:

1. What influences these price fluctuations?
2. Might it ever recover, and if so in what circumstances?

Thanks
V

Thrugelmir

valiant24 said:

Absolutely not what I was expecting, from a supposedly non-volatile investment.   

Never been my understanding. Gilt prices will primarily react to interest and inflation rate news. Why not exceed the LTE before locking in your gains. Then there would have been a cushion should markets fall. Never let the tail wag the dog. 

Do you understand how gilts work? Are the funds you bought the right ones for your objective?  

Albermarle

 as the upside - taxed at 55% - would be way less than the downside.

Did your accountant tell you that if you take the excess over LTA as income you 'only' pay 40 % if you are basic rate taxpayer?

If you were a regular reader of this forum , you would know that Gilts are not a very good investment at the moment.

They are ultimately safe but they can still vary in value.

Accountants are not necessarily experts in the field of personal finance /investments . They seem to have advised you that 45% of something ( or 60%) is better than 100% of nothing . 

aroominyork

valiant24 said:

1. What influences these price fluctuations?
2. Might it ever recover, and if so in what circumstances?

1. Events, dear boy, events.

2. Other events, dear boy, other events.

tebbins

That's not at all unusual. Gilts have an average volatility around 10% a year, however since the 70s interest rates have been falling from some very high levels. Falling interest makes gilts rise, and even in bad years for gilts like 2013, 1999, 1994, 1981, 1978 etc (Barclays Equity Gilts Study), the once high interest payments have dampened the effect of any falls in the capital value of gilts. The yield to maturity (https://www.investopedia.com/terms/y/yieldtomaturity.asp) on VGOV is now 0.7% so good luck with that.

VGOV is a distributing ETF that pays out the interest it receives, net of costs, so its value won't grow over the long term like if you held Vanguard UK Government Bond Fund - Acc, because with gilts the only return you get is the yield, there is no upward "drift" or "growth" like with stocks, just price wobbles that you could try and time for profit.
Gilts have a much longer average maturity, 14 years, than the average developed country's government bonds. This makes them more volatile as they are more sensitive to changes in interest rates.
Pensioncraft has produced a decent video on whether it's worth holding bonds now given the historically low yields: https://youtu.be/RWrRVvPey1Q

wmb194

If you want the absolute certainty of what you'll receive you should buy them individually and not via a fund/ETF.

valiant24

Thrugelmir said:

Why not exceed the LTE before locking in your gains. Then there would have been a cushion should markets fall. Never let the tail wag the dog. 

Yes, I rather wish I had.  Now at some point, unless my gilts recover their value, I'll need to sell some and invest in equities to try to get back up to the LTE.

valiant24

wmb194 said:

If you want the absolute certainty of what you'll receive you should buy them individually and not via a fund/ETF.

I was unaware that I could do this via a SIPP platform.

Malthusian

Albermarle said:

Accountants are not necessarily experts in the field of personal finance /investments . They seem to have advised you that 45% of something ( or 60%) is better than 100% of nothing . 

The accountant's logic is the other way round but I think we all knew what you meant.

In the field of extremely stupid financial ideas from accountants, this is not the worst I have encountered. I think the accountant's idea is that if you are at the Lifetime Allowance threshold, you get only 45% of any gains but suffer 100% of any losses, therefore a more risk averse strategy is called for.

I still think putting the whole lot in gilts is a stupid idea because, as the OP has found out, you are sacrificing return for no real gain in reduced risk. Ultimately if the SIPP is going to be held through the ups and downs (and when there is a big tax penalty for accessing it, there's a good chance you will) the short-term losses are irrelevant and you are left with your 45% of something instead of 100% of nothing.

The logic would make more sense if you were holding a more conservative balanced portfolio via your SIPP (e.g. 60/40 equities) while holding more exciting investments (smaller companies etc) in your own name.

Actually to be fair it is not clear whether this idea came from the accountant or was the OP's own.

OP - have you considered crystallising the SIPP (if you haven't already) so that at least the tax-free cash is removed from the LTA tax on further income and growth? It would be worth talking to an independent financial adviser rather than an accountant as LTA planning is complex.

MarkCarnage

Now at some point, unless my gilts recover their value, I'll need to sell some and invest in equities to try to get back up to the LTE.

Thereby potentially compounding your losses if equities don't perform as you expect....it's entirely possible if/when rates start rising, that both gilts and equities fall in value of course. 

You don't say what maturity/duration of gilts you've bought....if it's via a fund you may not know. Longer dated (long maturity) gilts will be more sensitive to interest rate/inflation changes than those which mature earlier. 

There is quite a bit of tax tail wagging investment dog in all this, and I'm with @Malthusian in thinking it's a stupid idea to be all in gilts, and it is up there with the worst of extremely stupid ideas from accountants....

Thrugelmir

Malthusian said:

Albermarle said:

Accountants are not necessarily experts in the field of personal finance /investments . They seem to have advised you that 45% of something ( or 60%) is better than 100% of nothing . 

The accountant's logic is the other way round but I think we all knew what you meant.

The accountant's answer was in response to the question asked. Wouldn't be investment advice per se as they aren't regulated to provide same. Derisking once the LTA is breached is sensibly logical.  How to approach this maybe worth spending a few hundred pounds to pick somebody's brains. As 3% of a £1m is £30k.  A small price to pay for guidance.