Gilts - my unanticipated nightmare

valiant24

Malthusian said:

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.

I have considered this, and taken some advice.   It's swings and roundabouts: it could work well for me but is sub-optimal from an IHT perspective so I've done nothing thus far.

valiant24

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....

VGOV and IGLT mainly, so no, I have no idea.  I have a 1-5yr ETF also, which has fared least badly.

Noted ref tail and dog.  I did omit to add that I have a large exposure to equities elsewhere, mainly in accumulated ISAs, so that gilts do not actually dominate my overall portfolio.

jamesd

valiant24 said:

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?

1. changes in interest rates or expected interest rates and for non-UK bonds (not UK gilts) changes in exchange rates.
2. If interest rates decrease

You put your money into gilts in a situation where interest rates were expected to increase and capital losses to occur. Your choice of investment duly delivered what was expected.

Gilts are quite low volatility compared to equities but say ten percent volatility a year all downwards for the next five years if rates continue to increase will still hurt you a lot.

You made a bad choice and paid for it.

If you want assured low volatility with losses no higher than inflation, use cash. If cash isn't allowed, use money market funds and take a small loss of maybe 0.1 to 0.2% a year in current conditions where interest rates are very low.

Cash is not bad. As you've just learned the hard way, we're in a situation where cash is likely to beat bonds because interest rates are expected to rise and unlike bonds, cash doesn't drop in value when interest rates go up. It's not a particularly common situation but it has historically happened a few times a century.

You've now reduced the percentage of the LTA that will be used if you crystallise. Why not exploit that and crystallise so you have some LTA left for future growth?

valiant24

jamesd said:

valiant24 said:

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?

1. changes in interest rates or expected interest rates and for non-UK bonds (not UK gilts) changes in exchange rates.
2. If interest rates decrease

You put your money into gilts in a situation where interest rates were expected to increase and capital losses to occur. Your choice of investment duly delivered what was expected.

Gilts are quite low volatility compared to equities but say ten percent volatility a year all downwards for the next five years if rates continue to increase will still hurt you a lot.

You made a bad choice and paid for it.

If you want assured low volatility with losses no higher than inflation, use cash. If cash isn't allowed, use money market funds and take a small loss of maybe 0.1 to 0.2% a year in current conditions where interest rates are very low.

Cash is not bad. As you've just learned the hard way, we're in a situation where cash is likely to beat bonds because interest rates are expected to rise and unlike bonds, cash doesn't drop in value when interest rates go up. It's not a particularly common situation but it has historically happened a few times a century.

You've now reduced the percentage of the LTA that will be used if you crystallise. Why not exploit that and crystallise so you have some LTA left for future growth?

Holding a large cash balance within a SIPP at 0.00% interest carries, aside from inflation chewing away at it, a counter-party risk that, if the platform (AJ Bell in my case) goes tits, my £1m or whatever cash is protected only to a limit of £85k, whereas at the the gilts, equities and other investments are ring-fenced and will remain mine.   I don't think AJ Bell is likely to go bust, but I'm still not prepared to bet huge amounts of cash on it not happening!

Would have time to explain please:
1. What are examples of the "money-market funds" you mention above that could be investable in from a SIPP platform?
2. The suggestion in the last para in more detail?  I don't really follow the meaning.

Cheers!

Thrugelmir

valiant24 said:

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....

 I did omit to add that I have a large exposure to equities elsewhere, mainly in accumulated ISAs, so that gilts do not actually dominate my overall portfolio.

If a 3.5% fall has shaken you. How comfortable are you with your equity exposure as the allocation currently stands. Markets can rapidly move 5% down in a day. Just requires a trigger.  

valiant24

Thrugelmir said:

If a 3.5% fall has shaken you. How comfortable are you with your equity exposure as the allocation currently stands. Markets can rapidly move 5% down in a day. Just requires a trigger.  

I've got into this position through self-investing over 20+ years, mainly with equities, including crashes in 2000, 2008 and 2020, so I am not spooked by large downwards movements in equities - indeed 60% of my investments are still in equities and doubtless there are bad days to come with that as well as (hopefully) many good ones.

I was just taken aback by the volatility in the Gilt ETFs, hence the OP.

jamesd

valiant24 said:

Holding a large cash balance within a SIPP at 0.00% interest carries, aside from inflation chewing away at it, a counter-party risk that, if the platform (AJ Bell in my case) goes tits, my £1m or whatever cash is protected only to a limit of £85k, whereas at the the gilts, equities and other investments are ring-fenced and will remain mine.   I don't think AJ Bell is likely to go bust, but I'm still not prepared to bet huge amounts of cash on it not happening!

Would have time to explain please:
1. What are examples of the "money-market funds" you mention above that could be investable in from a SIPP platform?
2. The suggestion in the last para in more detail?  I don't really follow the meaning.

Have you verified that the cash held in the AJ Bell SIPP is a deposit and hence protected by the FSCS? It doesn't have to be and might not be, it's a choice for the SIPP operator to make.

What it will be is held in a segregated client account where it will be almost as safe as money protected by the FSCS because it's not part of their assets. Not quite as safe because costs of administration can be taken from all client assets including cash and funds. Businesses are required to make daily reconciliations of these accounts to ensure that balances match tracked money that should be there, and penalties for getting it wrong are non-trivial.

1. Money market funds are those which invest in near-cash things including overnight secured bank lending and very short term bonds. Many major fund houses including Vanguard offer them. They almost never drop in value except through inflation. While not protected against investment losses these get the usual FSCS protection for investments limited per fund house not fund, which is mainly applicable in the case of fraud or insolvency at the investment business.

2. Your investments have fallen in value. If you crystallise now you'll use up less of your lifetime allowance than before the drop. That has the additional potentially useful property of moving 25% out of the SIPP so it's not necessarily at risk fro AJ Bell issues or whatever investment limitations there are inside their SIPP.

In addition, some places offer access to savings accounts from within the SIPP to their chosen providers. They undoubtedly take a cut but it might give you a non-zero before inflation return.

If you do see a need to use bonds or gilts, look at the "average maturity" reported for the fund. That's telling you how long to maturity there is in their holdings, on average. Pick ones with short durations, maybe as low as six months, to suffer lower losses when interest rates rise. Avoid those with long maturities because they magnify the effect.

wmb194

valiant24 said:

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.

Different providers offer different things but if you're using a stockbroker e.g., AJ Bell's Sipp then you'll normally be able to.

Prism

valiant24 said:

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....

VGOV and IGLT mainly, so no, I have no idea.  I have a 1-5yr ETF also, which has fared least badly.

Noted ref tail and dog.  I did omit to add that I have a large exposure to equities elsewhere, mainly in accumulated ISAs, so that gilts do not actually dominate my overall portfolio.

Just to try and put a few numbers on them..

VGOV has currently got an average duration of 13.7 years. This implies that a 1% increase in UK interest rates would cause the fund to drop around 13.7%. The reverse is also true but its difficult to imagine interest rates dropping further.

IGLT has an average duration of  12.1

In comparison a 0-5Yr Gilt fund like IGLS has an average duration of 2.6 which means it is more resilient to interest rate movements but its yield is lower too.

Albermarle

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.

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.

You are right, I got it the wrong way around ( after a glass of wine )