TN treasury gilts

nonolerigolo

Hello, what is the difference between UK gilt such as TN 25 and the same UK gilt but with indexes linked components. I understand how TN25 works but not the indexed linked. Thank you 

Linton

With Index Linked Gilts both the 6 monthly interest and the final return of capital at maturity increase with RPI.

nonolerigolo

Is indexed linked higher value. Or it can be higher or lower value depending on RPI in comparison to non indexed linked

masonic

They are quite complicated. Some show a price including index linking, some without. You'll obviously have to pay a price reflecting all of the accrued index linking, so this may be a lot more than the price shown. The nominal yield will tend to be a lot lower than standard gilts. For example a conventional gilt now yields about 4% to maturity, while an index linked gilt may be in the region of -1%. Index linked gilts tend to give better returns when inflation turns out to be higher than markets expect.

Albermarle

Anybody looking at index-linked bonds? — MoneySavingExpert Forum

nonolerigolo

Thank you, can i just check that if I buy TN25 at £95, at maturity I will get £100? I will also get the remaining coupon for TN25 until maturity. Thank you

masonic

nonolerigolo said:

Thank you, can i just check that if I buy TN25 at £95, at maturity I will get £100? I will also get the remaining coupon for TN25 until maturity. Thank you

Yes you will get £100 at maturity. The price you pay will have the accrued interest for this distribution period added on to it and you will receive the full income payable if purchased by the next XD date.

zagfles

masonic said:

They are quite complicated. Some show a price including index linking, some without. You'll obviously have to pay a price reflecting all of the accrued index linking, so this may be a lot more than the price shown. The nominal yield will tend to be a lot lower than standard gilts. For example a conventional gilt now yields about 4% to maturity, while an index linked gilt may be in the region of -1%. Index linked gilts tend to give better returns when inflation turns out to be higher than markets expect.

I've been looking at index linked gilts, and if I understand correctly the real yield on most of them is now at last positive, which means if you hold it to maturity you'll gain in real terms (subject to charges etc). So now it does seem conceivable that someone who "has enough" and whose only objective is to preserve their pot in real terms rather than increase it, could buy a "gilt ladder" with maturity dates aligned to their spending requirements, so guarantee the current real value of their pot...

NedS

zagfles said:

masonic said:

They are quite complicated. Some show a price including index linking, some without. You'll obviously have to pay a price reflecting all of the accrued index linking, so this may be a lot more than the price shown. The nominal yield will tend to be a lot lower than standard gilts. For example a conventional gilt now yields about 4% to maturity, while an index linked gilt may be in the region of -1%. Index linked gilts tend to give better returns when inflation turns out to be higher than markets expect.

I've been looking at index linked gilts, and if I understand correctly the real yield on most of them is now at last positive, which means if you hold it to maturity you'll gain in real terms (subject to charges etc). So now it does seem conceivable that someone who "has enough" and whose only objective is to preserve their pot in real terms rather than increase it, could buy a "gilt ladder" with maturity dates aligned to their spending requirements, so guarantee the current real value of their pot...

Or buy an annuity and let the annuity provider take care of it for them, in the knowledge that you'd also be buying a guarantee against longevity.

I just did a simplistic spreadsheet analysis of a single life flat rate annuity at 65 (£7245 on HL) versus 20 year UK gilts returning 5%, and the break even point is 25 years (age 65 -> 89), which seems reasonable for a 65 year old. The annuity is performing exactly as a gilt ladder would. The trade-offs are live longer and the annuity keeps paying, die young and the gilt ladder returns your estate any unspent capital. For a couple the gilt ladder would have additional advantages as it continues to pay out in full upon first death whereas a joint life 50% annuity pays a lower £6654 and only 50% to partner upon death.

I have not tried modelling for index-linked gilts verses inflation linked annuities, but I would expect similar results.

masonic

zagfles said:

masonic said:

They are quite complicated. Some show a price including index linking, some without. You'll obviously have to pay a price reflecting all of the accrued index linking, so this may be a lot more than the price shown. The nominal yield will tend to be a lot lower than standard gilts. For example a conventional gilt now yields about 4% to maturity, while an index linked gilt may be in the region of -1%. Index linked gilts tend to give better returns when inflation turns out to be higher than markets expect.

I've been looking at index linked gilts, and if I understand correctly the real yield on most of them is now at last positive, which means if you hold it to maturity you'll gain in real terms (subject to charges etc). So now it does seem conceivable that someone who "has enough" and whose only objective is to preserve their pot in real terms rather than increase it, could buy a "gilt ladder" with maturity dates aligned to their spending requirements, so guarantee the current real value of their pot...

Yes, I've come to the same conclusion about the real yield. Because of the way the indexation works, its not quite as simple as that, but this is all more or less correct, and I've not yet had the inclination to sit down and work out those minor intricacies.

zagfles

NedS said:

zagfles said:

masonic said:

They are quite complicated. Some show a price including index linking, some without. You'll obviously have to pay a price reflecting all of the accrued index linking, so this may be a lot more than the price shown. The nominal yield will tend to be a lot lower than standard gilts. For example a conventional gilt now yields about 4% to maturity, while an index linked gilt may be in the region of -1%. Index linked gilts tend to give better returns when inflation turns out to be higher than markets expect.

I've been looking at index linked gilts, and if I understand correctly the real yield on most of them is now at last positive, which means if you hold it to maturity you'll gain in real terms (subject to charges etc). So now it does seem conceivable that someone who "has enough" and whose only objective is to preserve their pot in real terms rather than increase it, could buy a "gilt ladder" with maturity dates aligned to their spending requirements, so guarantee the current real value of their pot...

Or buy an annuity and let the annuity provider take care of it for them, in the knowledge that you'd also be buying a guarantee against longevity.

I just did a simplistic spreadsheet analysis of a single life flat rate annuity at 65 (£7245 on HL) versus 20 year UK gilts returning 5%, and the break even point is 25 years (age 65 -> 89), which seems reasonable for a 65 year old. The annuity is performing exactly as a gilt ladder would. The trade-offs are live longer and the annuity keeps paying, die young and the gilt ladder returns your estate any unspent capital. For a couple the gilt ladder would have additional advantages as it continues to pay out in full upon first death whereas a joint life 50% annuity pays a lower £6654 and only 50% to partner upon death.

I have not tried modelling for index-linked gilts verses inflation linked annuities, but I would expect similar results.

Yes an annuity makes sense if the purpose of your pot is an income for life, but not everyone needs that, some people will use it (or part of it) to fill a gap in income eg between early retirement and state pension age, or their DB pension age.

So for instance someone aged 55 who wants to retire, whose DB pension plus state pension will be enough from age 67, who have saved enough in a DC pension to last them 12 years. All they need is inflation protection on their DC pension for the next 12 years.