Gilts Understanding

cwep2

ChilliBob said:

I've just done some rough calculations, which I'm pretty sure have a couple of holes, however, curious to see if people think this is roughly the size of it.

FIGHT! - In the blue corner we have TN25, in the red corner we have Investec 12 Month fixed saver..

Investec Saver: 5.35%, assume 20% tax on the interest = 4.28% interest rate in the end.
TN25 Gilt: 

Buy price = 92.75
Redemption = 100
Period = 19 Months
Interest over period = 7.25%  (Ignoring coupon)
(7.25/19)*12 = 4.83  (factoring in the 0.25% coupon (received twice?) and 20% reduction in this due to tax)

So, the gilt improves the interest one would get by 0.55%.. Admittedly this isn't apples with apples since one is 12 months and one is 19 - but 18 month fixes aren't too different a rate to the Investec one.

So, if you had 50k invested the gilt side of things would net you a gain (ignoring trading costs) of £275

It's obviously better to have £275 than not - I guess how much you have to invest/save in this situation dictates if it's worthwhile or not for you.

OK so I have been waiting patiently and jumped in this morning to exactly this.
For reference I bought via iWeb this morning (on phone to get much better price, typically 0.02 above mid you see on the screen) at 92.484 clean price = 92.5772 dirty price.
£50k approx £54k notional gilts = cost £49,996.71 (inc £5 trading fee)
Coupons to be paid £270 but 20% tax would be on this amount net of accrued interest  = 0.2 * £219.65 = £43.93
Up until maturity I get £54k principal + £270 coupons - £43.93 tax - £49,996.71 purchase price = £4229.36 net of tax (assuming basic rate).

I assumed 5.35% rate paid after 12 months (giving £56,889) which then paid 5.35% simple interest for the remaining 233 days (until 31Jan25), that would give approx £4,832 which after 20% tax is £3,866.

The Gilt investment is £363 better off. 

Caveat - this would have been worse at yesterday's prices and the yearly fix rates will probably go up, but it still beats it by around 0.5% (annualised) so even on that basis it would have been 0.3-0.4% better.

guli

cwep2 said:

ChilliBob said:

I've just done some rough calculations, which I'm pretty sure have a couple of holes, however, curious to see if people think this is roughly the size of it.

FIGHT! - In the blue corner we have TN25, in the red corner we have Investec 12 Month fixed saver..

Investec Saver: 5.35%, assume 20% tax on the interest = 4.28% interest rate in the end.
TN25 Gilt: 

Buy price = 92.75
Redemption = 100
Period = 19 Months
Interest over period = 7.25%  (Ignoring coupon)
(7.25/19)*12 = 4.83  (factoring in the 0.25% coupon (received twice?) and 20% reduction in this due to tax)

So, the gilt improves the interest one would get by 0.55%.. Admittedly this isn't apples with apples since one is 12 months and one is 19 - but 18 month fixes aren't too different a rate to the Investec one.

So, if you had 50k invested the gilt side of things would net you a gain (ignoring trading costs) of £275

It's obviously better to have £275 than not - I guess how much you have to invest/save in this situation dictates if it's worthwhile or not for you.

OK so I have been waiting patiently and jumped in this morning to exactly this.
For reference I bought via iWeb this morning (on phone to get much better price, typically 0.02 above mid you see on the screen) at 92.484 clean price = 92.5772 dirty price.
£50k approx £54k notional gilts = cost £49,996.71 (inc £5 trading fee)
Coupons to be paid £270 but 20% tax would be on this amount net of accrued interest  = 0.2 * £219.65 = £43.93
Up until maturity I get £54k principal + £270 coupons - £43.93 tax - £49,996.71 purchase price = £4229.36 net of tax (assuming basic rate).

I assumed 5.35% rate paid after 12 months (giving £56,889) which then paid 5.35% simple interest for the remaining 233 days (until 31Jan25), that would give approx £4,832 which after 20% tax is £3,866.

The Gilt investment is £363 better off. 

Caveat - this would have been worse at yesterday's prices and the yearly fix rates will probably go up, but it still beats it by around 0.5% (annualised) so even on that basis it would have been 0.3-0.4% better.

how does £50k cost equals to £54k notional gilts wiht a 92.484 clean price?

wmb194

guli said:

cwep2 said:

ChilliBob said:

I've just done some rough calculations, which I'm pretty sure have a couple of holes, however, curious to see if people think this is roughly the size of it.

FIGHT! - In the blue corner we have TN25, in the red corner we have Investec 12 Month fixed saver..

Investec Saver: 5.35%, assume 20% tax on the interest = 4.28% interest rate in the end.
TN25 Gilt: 

Buy price = 92.75
Redemption = 100
Period = 19 Months
Interest over period = 7.25%  (Ignoring coupon)
(7.25/19)*12 = 4.83  (factoring in the 0.25% coupon (received twice?) and 20% reduction in this due to tax)

So, the gilt improves the interest one would get by 0.55%.. Admittedly this isn't apples with apples since one is 12 months and one is 19 - but 18 month fixes aren't too different a rate to the Investec one.

So, if you had 50k invested the gilt side of things would net you a gain (ignoring trading costs) of £275

It's obviously better to have £275 than not - I guess how much you have to invest/save in this situation dictates if it's worthwhile or not for you.

OK so I have been waiting patiently and jumped in this morning to exactly this.
For reference I bought via iWeb this morning (on phone to get much better price, typically 0.02 above mid you see on the screen) at 92.484 clean price = 92.5772 dirty price.
£50k approx £54k notional gilts = cost £49,996.71 (inc £5 trading fee)
Coupons to be paid £270 but 20% tax would be on this amount net of accrued interest  = 0.2 * £219.65 = £43.93
Up until maturity I get £54k principal + £270 coupons - £43.93 tax - £49,996.71 purchase price = £4229.36 net of tax (assuming basic rate).

I assumed 5.35% rate paid after 12 months (giving £56,889) which then paid 5.35% simple interest for the remaining 233 days (until 31Jan25), that would give approx £4,832 which after 20% tax is £3,866.

The Gilt investment is £363 better off. 

Caveat - this would have been worse at yesterday's prices and the yearly fix rates will probably go up, but it still beats it by around 0.5% (annualised) so even on that basis it would have been 0.3-0.4% better.

how does £50k cost equals to £54k notional gilts wiht a 92.484 clean price?

Because you're buying below par i.e. £100.

stone_circle

spider42 said:

..coupon of only 0.125%, so the Income Tax on it is tiny. The offer price is currently £92.98, so almost all of the return is from the capital gain. 

I notice there are types of gilts called strips, which offer returns entirely in capital gain (price increase). Zero coupon. Higher returns than conventional gilts outside an ISA. But neither iWeb nor HL carry them (not even by phone). Anyone know a way for retail investors to buy them?

coyrls

stone_circle said:

spider42 said:

..coupon of only 0.125%, so the Income Tax on it is tiny. The offer price is currently £92.98, so almost all of the return is from the capital gain. 

I notice there are types of gilts called strips, which offer returns entirely in capital gain (price increase). Zero coupon. Higher returns than conventional gilts outside an ISA. But neither iWeb nor HL carry them (not even by phone). Anyone know a way for retail investors to buy them?

HL have prices and factsheets for some (e.g. https://www.hl.co.uk/shares/shares-search-results/u/uk-treasury-strip-4.5-07092034-principal), which implies that you can purchase through HL.  If you click the "Deal" tab it says:

UK Treasury Strip 4.5% 07/09/2034 Principal cannot currently be traded online. For further information about trading this security, or to obtain a current price, please telephone our dealers on
0117 980 9800 during market hours. Please note that if the buying and selling price quoted on this page are the same it may not be an accurate price.

Johnjdc

stone_circle said:

spider42 said:

..coupon of only 0.125%, so the Income Tax on it is tiny. The offer price is currently £92.98, so almost all of the return is from the capital gain. 

I notice there are types of gilts called strips, which offer returns entirely in capital gain (price increase). Zero coupon. Higher returns than conventional gilts outside an ISA. But neither iWeb nor HL carry them (not even by phone). Anyone know a way for retail investors to buy them?

Note that while capital gain on gilts is tax free, capital gain on strip is in principle counted as interest income. So if you're a taxpayer the low coupon gilts are better than strip.

masonic

ChilliBob said:

What are the complexities I'm overlooking? (I saw PensionCraft video about buying Index Linkers and that being painful, but I thought simple gilts wouldn't be any more complex than buying an OEIC, ETF or share?)

The complexities are just that they aren't traded as easily as other investments and you have to be confident with the sums to make sure you are getting the deal you think you are when buying. It's very easy to misunderstand something and pick a bad deal, such as the high coupon above par gilt discussed upthread, or assume that strips are included in the tax-exempt CG status instruments without checking.

At the moment the situation is very fluid with both gilt yields and savings moving up week by week. If you have a large amount to invest and have already exhausted your PSA, then the tax saving can swing it for the low coupon gilts. However, wait a week or two and it can swing the other way.

If you wanted to have a £50k position in TN25, it may be worthwhile to buy in tranches.

stone_circle

capital gain on strip is in principle counted as interest income

Damn it. You're right according to this list of CGT-exempt gilts HMRC publish. No strips are listed. Oh well, conventional gilts it is.

cwep2

guli said:

how does £50k cost equals to £54k notional gilts wiht a 92.484 clean price?

For a Gilt that will pay £100 at maturity that costs £92.484 now (well £92.577 really), if I buy £50,000 notional now I will only pay £46,242 + accrued interest of £46.50 = £46,288.50 total. These are slightly rounded numbers for simplicity.

If I want to invest £50,000 now I need to buy more.
It's a slightly complex calculation to work out exactly how much you can buy as the price quoted is the clean price and you need to have enough funds to pay the dirty price - if you have exactly £50k in your account and you see the clean price quoted as 92.484 then you don't have enough money to buy £54,063 of gilts (= 50,000/0.92484) as you have forgotten to take into account accrued interest, you will also need to factor in dealing costs.

Alex9384

wmb194 said:

If your plan is to hold to maturity savings accounts are offering better rates, see below. It depends how much you're looking to deposit but you can find 5% to 6.25% instant access accounts e.g., Barclays Rainy Day Saver 5% on up to £5k plus various regular savers e.g., Lloyds Club £400pm 6.25%.

Club Lloyds monthly saver has gone down to 5.25% and max £250 per month now.