Gilts - my unanticipated nightmare

masonic

valiant24 said:

masonic said:

 It comes back again to what is purpose of the asset in your portfolio? Volatility reducer? Somewhere to park cash before investing later? Investing money that will be needed in the short-medium term? Just a way to pay less tax by investing in something with no growth potential? Without a rationale you stand little hope of selecting an appropriate solution.

1. I don't want to end up living in a cardboard box because the equities market experienced 1929 levels of loss just when I needed the dosh.

2. I am in the fortunate position I am now through, over 30 years, investing in equities in a set-and-forget manner.  All else being equal I would plough on, accepting rough with smooth.   HOWEVER, the LTA completely distorts the maths.   A SIPP with assets whose value is close to the LTA could be left wholly or largely in equities, but any gains will be taxed ruinously.  So if the upside, because of the LTA, is so miserable, surely much better to lock in its value at or near the LTA, with little prospect of loss in absolute terms?

What is your investment horizon? You mention not wanting to experience a major crash just when you need the money - which is something everyone should take action to avoid. If, however, that is still decades away, it should not really be a consideration as the best way to protect against such a situation is by investing for the long-term. If you will need this money within 5-10 years, then it should not be invested in equities and low risk options including gilts could be considered. If you need it in less than 5 years, then a money market fund may be preferable since, as you have learned, gilts and other bonds can fluctuate in value.

However, if you have the risk appetite to invest in assets with a higher long-term return, I can't follow your logic in deliberately choosing assets that won't generate a return. If I could hold for 10-15 years assets returning 5%pa, but I'd be taxed 55% on the growth, reducing my returns to 2.25%, I would be happy to take that over something returning 0.5% or guaranteed to lose a small amount. Arranging your assets so that those likely to have the lowest returns sit in the pension makes sense to me; depriving yourself of better performing assets to avoid sharing with the tax man does not.

masonic

Diplodicus said:

What I know about gilts could be written on the rim of a brandy glass with a crayon but this what happened to cable when covid became a panic:

https://uk.finance.yahoo.com/quote/GBPUSD=X?p=GBPUSD=X&.tsrc=fin-srch

All I'm seeing is a GBP:USD forex chart showing March-July 2020 at ~1.23, similar to where it was in June-September 2019 when there was no crisis. Within its post-EU referendum trading range.

Edit: I see what I think you were referring to now - had to maximise the chart and zoom to the right point. There is a pronounced dip that goes down to 1.15, reversed at the next timepoint. Interestingly hedging on the major hedged global bond funds went awry at the same time, leading to a very odd looking positive then negative asymptote, a bit like a plot of the tangent function.

Diplodicus

masonic said:

Diplodicus said:

What I know about gilts could be written on the rim of a brandy glass with a crayon but this what happened to cable when covid became a panic:

https://uk.finance.yahoo.com/quote/GBPUSD=X?p=GBPUSD=X&.tsrc=fin-srch

All I'm seeing is a GBP:USD forex chart showing March-July 2020 at ~1.23, similar to where it was in June-September 2019 when there was no crisis. Within its post-EU referendum trading range.

If you take the start of the thread
https://forums.moneysavingexpert.com/discussion/6110470/liquidate-entire-portfolio-until-virus-is-over/p1 
as the start of the panic - and the Fed steadying world markets as the turning point, £ plummeted from 1.29 to sub 1.15 in two weeks.

masonic

Diplodicus said:

masonic said:

Diplodicus said:

What I know about gilts could be written on the rim of a brandy glass with a crayon but this what happened to cable when covid became a panic:

https://uk.finance.yahoo.com/quote/GBPUSD=X?p=GBPUSD=X&.tsrc=fin-srch

All I'm seeing is a GBP:USD forex chart showing March-July 2020 at ~1.23, similar to where it was in June-September 2019 when there was no crisis. Within its post-EU referendum trading range.

If you take the start of the thread
https://forums.moneysavingexpert.com/discussion/6110470/liquidate-entire-portfolio-until-virus-is-over/p1 
as the start of the panic - and the Fed steadying world markets as the turning point, £ plummeted from 1.29 to sub 1.15 in two weeks.

Yes, got it, I'd just edited my post to say I'd figured out how to maximise and zoom in on the relevant period to see the transient plunge.

pip895

valiant24 said:

Albermarle said:

From what I see in other discussions on this , it seems the usual advice in your position is to crystallise the whole SIPP at just under LTA now . Then  make sure all growth is withdrawn as income before the test at 75. In this case you would not pay any LTA tax .

But ... but ... my poor, feckless kids ...!!!

If they are not really feckless wouldn't the 25% TFLS be better off growing in their ISAs & SIPPs? 

The thing that pushed me towards crystallising the lot now, was that the LTA is frozen until 2026 and there is no guarantee of it going up even with inflation then.  This means in real terms the LTA is reducing over time - so better to lock in the value now. 

This means that the crystallised pot can then be put into a more balanced portfolio that can be allowed to grow. I can then take an income from it sufficient to keep it below the LTA threshold at 75.   

I would personally be surprised if the tax free status of SIPPs survives 20-30 years, so I am not going to distort my finances too much to take advantage of it.  If the status is still in place and they still only test at 75, then when/if I reach 75, I will stop withdrawing from my SIPP and I may even move it to a more aggressive equity allocation. 

valiant24

pip895 said:

valiant24 said:

Albermarle said:

From what I see in other discussions on this , it seems the usual advice in your position is to crystallise the whole SIPP at just under LTA now . Then  make sure all growth is withdrawn as income before the test at 75. In this case you would not pay any LTA tax .

But ... but ... my poor, feckless kids ...!!!

If they are not really feckless wouldn't the 25% TFLS be better off growing in their ISAs & SIPPs? 

The thing that pushed me towards crystallising the lot now, was that the LTA is frozen until 2026 and there is no guarantee of it going up even with inflation then. 

My LTA is frozen in perpetuity and has been since 2012.   But I take the point.

jamesd

You seem to have the potential to crystallise and make the kids sure they can retire by 57 or maybe 55 using pension money if they want. They don't have a lifetime allowance constraint that causes them to want to invest quite a bit at low risk so the expected value is a good deal higher than if you waited until death.

Thrugelmir

@valiant24 how has your equity portfolio performed in the last month, worse than the gilts element? 

valiant24

jamesd said:

You seem to have the potential to crystallise and make the kids sure they can retire by 57 or maybe 55 using pension money if they want. They don't have a lifetime allowance constraint that causes them to want to invest quite a bit at low risk so the expected value is a good deal higher than if you waited until death.

Good point.
I sold the Gilt ETFs today, by the way, and took the hit.   I'm now sitting on a pile of cash pondering my next ill-judged move.

jamesd

Thanks for the handy pictures and a reminder: they are more about illustrating volatility (commonly called risk) than they are about the long term trend of returns, which is expected, with the usual lots of variability, to be down via capital losses for the UK, if the BoE gets to succeed in doing what it wants. Of course Covid-19 intervened last time so there's plenty of timing uncertainty.