Gilts - my unanticipated nightmare

jaybeetoo

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?

Thanks
V

You haven’t said how old you are, when you intend to retire and how you plan on generating an income for your retirement (drawdown, annuity).

I could understand you locking in gains if you are just about to buy an annuity but if your plan is drawdown then you need a different strategy to avoid your pension suffering from inflation.

I don’t understand why paying tax on 55% of anything over LTE is a problem.  Surely it’s better to get 45% of anything over LTE than to get nothing over LTE (assuming you’re not still putting money into your SIPP).

I think you need to step back and look at the big picture and get some independent financial advice.

EdSwippet

jaybeetoo said:
I don’t understand why paying tax on 55% of anything over LTE is a problem.  Surely it’s better to get 45% of anything over LTE than to get nothing over LTE (assuming you’re not still putting money into your SIPP).

You phrased this as if the OP moved to zero-return investments. They did not. They realigned their pension holdings from stocks into gilts. Both have some level of expected return.

In this post, the OP states that they have 60% of their investments in equities, just outside of their pension. There is nothing extreme about a 60/40 overall portfolio. It is entirely vanilla. And if that's the portfolio you hold, then putting your expected lowest-returning assets into your least tax-efficient wrapper -- and the LTA is entirely designed to make a pension tax-inefficient -- is entirely sensible.

csgohan4

if you want reduced risk, Wealth preservation funds would be reasonable, least they would in theory help with inflation.

Glits at this time is not something I would put money in if I was retired. 

A poster on here, Linton, has 3 types of funds for retirement which i think is a good all round strategy:
Income, Equities/growth and Wealth Preservation,  what percentage is your own personal preference

valiant24

jaybeetoo said:

You haven’t said how old you are, when you intend to retire and how you plan on generating an income for your retirement (drawdown, annuity).

I could understand you locking in gains if you are just about to buy an annuity but if your plan is drawdown then you need a different strategy to avoid your pension suffering from inflation.

I don’t understand why paying tax on 55% of anything over LTE is a problem.  Surely it’s better to get 45% of anything over LTE than to get nothing over LTE (assuming you’re not still putting money into your SIPP).

I think you need to step back and look at the big picture and get some independent financial advice.

I'm 61.  Mrs V and I have effectively retired.  At present we am living off savings.  Over time we will exhaust them, then sell investments held outside ISAs, then the investments within ISAs, and finally the SIPP ... albeit that I plan to start making small drawings from the SIPP soon in order to utilise my basic rate tax band.

EdSwippet summarised it beautifully.  The SIPP contains the vast bulk of my gilt holdings because the LTA makes it highly tax-inefficient beyond a certain point, to which I am close.   Albeit that I may not have made the best gilt selection - I chose the ones I did because their nominal time period (10-15 years) are consistent with the timescale over which I expect to hold them, in accordance (I think!) with the Lars Kroijer approach.

valiant24

Prism said:

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.

Thanks Prism!   I'm not expecting to touch this dosh in any serious way for 10+ years, excepting maybe annual smallish (£20k) withdrawals to use up my tax allowance, and of course the possibility of taking the tax-free sum.

Thus, in accordance with the ideas put forward by Lars Kroijer and others, I chose the longer-term gilts that are currently doing so poorly.

EdSwippet

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. 

No, they haven't. Bonds have an expected positive return(*), though (clearly) not necessarily over the short term.

There are plenty of scenarios where advising moving from stocks to bonds in a pension might be questionable advice, but also plenty where it can be good advice. Since none of us here knows the OP's full financial circumstances, it is not valid to conclude that this advice fell into the 'questionable' category.

The current trope in these parts of labelling any move to de-risk pension holdings as moving to "100% of nothing" is mathematically and logically inaccurate, and unhelpful.


(*) Historically, anyway. Whether they still do for any realistic investor lifetime is a different argument.

EdSwippet

valiant24 said:
I'm 61.  Mrs V and I have effectively retired.  At present we am living off savings.  Over time we will exhaust them, then sell investments held outside ISAs, then the investments within ISAs, and finally the SIPP ... albeit that I plan to start making small drawings from the SIPP soon in order to utilise my basic rate tax band.

Have you crystallised any of your SIPP yet? Did your accountant have any view on this? If your entire SIPP is currently uncrystallised, now might be the time to consider crystallising some, most, or even all of it.

The logic is this. Growth on your not-yet-taken tax-free lump sum still sitting in the SIPP will be subject to the LTA penalty once over the threshold. If you remove it, the tax on its growth will be less even if reinvested identically in unwrapped accounts outside. For extra brownie points, you can transition it into ISAs, though that will take some years.

Also, by crystallising now you buy yourself 14 years, to age 75, before you again have to tangle with the LTA. During that time, taking out enough (taxable) withdrawals will defuse the spiteful age-75 LTA test.

All assuming you want to maximise your pension's spending power, rather than (say) use it as a pure inheritance tax bypass.

valiant24

EdSwippet said:

valiant24 said:
I'm 61.  Mrs V and I have effectively retired.  At present we am living off savings.  Over time we will exhaust them, then sell investments held outside ISAs, then the investments within ISAs, and finally the SIPP ... albeit that I plan to start making small drawings from the SIPP soon in order to utilise my basic rate tax band.

Have you crystallised any of your SIPP yet? Did your accountant have any view on this? If your entire SIPP is currently uncrystallised, now might be the time to consider crystallising some, most, or even all of it.

The logic is this. Growth on your not-yet-taken tax-free lump sum still sitting in the SIPP will be subject to the LTA penalty once over the threshold. If you remove it, the tax on its growth will be less even if reinvested identically in unwrapped accounts outside. For extra brownie points, you can transition it into ISAs, though that will take some years.

Also, by crystallising now you buy yourself 14 years, to age 75, before you again have to tangle with the LTA. During that time, taking out enough (taxable) withdrawals will defuse the spiteful age-75 LTA test.

All assuming you want to maximise your pension's spending power, rather than (say) use it as a pure inheritance tax bypass.

Thank you, Ed.
Is there anywhere you can recommend that I can read up on all this, because although I believe myself to be pretty clued-up, I don't completely follow your explanation?

My accountant's view thus far is that the benefit of taking the tax-free sum now is slightly outweighed by its removal from IHT protection.   I note others' comments that accountants are not always great advisors but I do think mine is quite switched on.

I haven't contributed to the SIPP for about a decade because (on the advice of the same accountant) I agreed to stop doing so in return for locking in a specific LTA, which is much higher than the current one.

(All this very valuable debate has drifted away from my original implied question about whether I am in the right gilt ETFs or not!)

coastline

valiant24 said:

EdSwippet said:

valiant24 said:
I'm 61.  Mrs V and I have effectively retired.  At present we am living off savings.  Over time we will exhaust them, then sell investments held outside ISAs, then the investments within ISAs, and finally the SIPP ... albeit that I plan to start making small drawings from the SIPP soon in order to utilise my basic rate tax band.

Have you crystallised any of your SIPP yet? Did your accountant have any view on this? If your entire SIPP is currently uncrystallised, now might be the time to consider crystallising some, most, or even all of it.

The logic is this. Growth on your not-yet-taken tax-free lump sum still sitting in the SIPP will be subject to the LTA penalty once over the threshold. If you remove it, the tax on its growth will be less even if reinvested identically in unwrapped accounts outside. For extra brownie points, you can transition it into ISAs, though that will take some years.

Also, by crystallising now you buy yourself 14 years, to age 75, before you again have to tangle with the LTA. During that time, taking out enough (taxable) withdrawals will defuse the spiteful age-75 LTA test.

All assuming you want to maximise your pension's spending power, rather than (say) use it as a pure inheritance tax bypass.

Thank you, Ed.
Is there anywhere you can recommend that I can read up on all this, because although I believe myself to be pretty clued-up, I don't completely follow your explanation?

My accountant's view thus far is that the benefit of taking the tax-free sum now is slightly outweighed by its removal from IHT protection.   I note others' comments that accountants are not always great advisors but I do think mine is quite switched on.

I haven't contributed to the SIPP for about a decade because (on the advice of the same accountant) I agreed to stop doing so in return for locking in a specific LTA, which is much higher than the current one.

(All this very valuable debate has drifted away from my original implied question about whether I am in the right gilt ETFs or not!)

I bookmarked this thread a few years ago as I thought it might be of use.

Understanding the 25% SIPP tax free process - Retirement - Forums - Citywire Funds Insider Forum

Some bond ideas.

The best Vanguard bond funds for UK investors - Occam Investing

Fixed Income Investor

EdSwippet

valiant24 said:

Is there anywhere you can recommend that I can read up on all this, because although I believe myself to be pretty clued-up, I don't completely follow your explanation?

My accountant's view thus far is that the benefit of taking the tax-free sum now is slightly outweighed by its removal from IHT protection.   I note others' comments that accountants are not always great advisors but I do think mine is quite switched on.

I haven't contributed to the SIPP for about a decade because (on the advice of the same accountant) I agreed to stop doing so in return for locking in a specific LTA, which is much higher than the current one.

This article seems to me to sum up fairly well the pros and cons of crystallising at the LTA versus waiting until later:

The Lifetime Allowance (LTA) freeze and when to Crystallise - Henwood Court

There is no simple one-size-fits-all answer. Worth noting that the article indicates that the LTA inflation uplift freeze "removed an advantage of leaving funds uncrystallised". Protected LTAs never had this advantage in the first place. The protection levels are all fixed values. (At some future point, and if LTA inflation uplifts are ever reinstated, the standard LTA will overhaul the protected ones.) A common investor error is to neglect or discount the forced LTA test at age 75.

As for the tax aspect to this, say you have a SIPP that currently sits exactly at your LTA. And say investment growth adds £100. On withdrawal, you will pay 25% LTA penalty on this £100, then marginal tax, perhaps 20% assuming basic rate tax, giving an effective 40% rate. £60 return on £100 of gain.

Now, suppose instead you crystallise this SIPP, and reinvest the 25% lump sum in the same assets, just outside the pension. You now get £25 of growth outside the pension, taxable at perhaps 10% capital gains, or 8.75% dividends (again assuming basic rate tax), and £75 of growth inside the pension, withdrawable at your marginal tax rate of 20%. Combined, around £82 return on £100 of gain.

Running the same numbers for higher rate tax shows a similar LTA advantage to crystallising now. Note the assumption of constant tax brackets; if you were to shift from higher rate to lower rate (or lower rate to zero) at some point, the calculus changes.

Again though, this entirely ignores IHT issues, and avoiding IHT may be more valuable to you than avoiding the LTA penalty. It all depends what your goals are for this money, and at what age you plan to die(!). Also, what are the chances that the LTA rules don't change (worsen further) in future?