A couple of simple gilt questions.. I think!

zagfles

Workerbee999 said:

aroominyork said:

Johnjdc said:

Does anyone know why TY25 seems (if bought in a tax advantaged account) to be sticking out like a sore thumb in terms of being more generous than the yield curve?

https://www.yieldgimp.com/gilt-yields

It's interesting. First, put aside the question of whether late October 2025 is the sweet spot for gilt yields, ie the date the market expects the base rate to start falling. A high coupon gilt like TY25 seems a good investment if you do not have to pay tax on the coupon (either your income is within the personal tax allowance or you are tax-wrapped in a SIPP/ISA) but a bad place if you are a 40% taxpayer. So that seems to be reflected in the pricing - lower demand for this gilt (I would not buy it) pushes the price down and hence the gross yield up.

Hi. I’m new to gilts but looking at moving some of my HL SSIP (assuming they offer it) into this to de-risk as I’m 55 in Sep 2025 and want to start accessing around then (to fill the gap to DBs).I had seen TN25 mentioned a couple of times but just read your comment here, and the Oct 25 timing fits in with my timescale.

but I’m quite nervous about it as I don’t understand coupon rates, accrued interest and how gilts work in general when held to maturity - and what if I changed my mind, can it be sold again in the same way I would buy now, what is the risk?.

I did notice your comment though that this TY25 could be attractive if not having to pay tax on the coupon, and this would be in my SSIP, but I don’t understand why it could be good? If you could possibly spend a few minutes giving me an idiots guide on how to understand and pick the right one I would be really grateful.

Say you buy £1000 worth of TY25

Current buy price is 95.42p so will get you 1048 units.

In addition you pay accrued interest, which is interest between the last coupon payment date and the settlement date (usually 2 days after the trade). As that interest belongs to the previous holder of the gilt. But you get this back with the next coupon payment, as that gives you the full 6 months interest. So eg if you buy 2 months after the last coupon date, ie 4 months before the next one, you have to pay 2 months accrued interest when buying, but then 4 months later you'll get paid 6 months' interest, so you overall you'll get 4 months interest for holding the gilts for 4 months which you'd expect.

Also you'll probably need to pay broker fee to buy, usually around £10 or so.

At maturity you'll get 100p per unit, so you'll make a guaranteed capital gain if you buy at 95.42p and hold to maturity. Also the coupon is based on the face value, so if you buy below par the interest you earn on your investment is more than the coupon.

You can sell before maturity but that'll be at the whims of the market so no guarantee what price you'll get.

spider42

zagfles said:

spider42 said:

Workerbee999 said:

aroominyork said:

Doctor_Who said:

Workerbee999 said:

aroominyork said:

Johnjdc said:

Does anyone know why TY25 seems (if bought in a tax advantaged account) to be sticking out like a sore thumb in terms of being more generous than the yield curve?

https://www.yieldgimp.com/gilt-yields

It's interesting. First, put aside the question of whether late October 2025 is the sweet spot for gilt yields, ie the date the market expects the base rate to start falling. A high coupon gilt like TY25 seems a good investment if you do not have to pay tax on the coupon (either your income is within the personal tax allowance or you are tax-wrapped in a SIPP/ISA) but a bad place if you are a 40% taxpayer. So that seems to be reflected in the pricing - lower demand for this gilt (I would not buy it) pushes the price down and hence the gross yield up.

Hi. I’m new to gilts but looking at moving some of my HL SSIP (assuming they offer it) into this to de-risk as I’m 55 in Sep 2025 and want to start accessing around then (to fill the gap to DBs).I had seen TN25 mentioned a couple of times but just read your comment here, and the Oct 25 timing fits in with my timescale.

but I’m quite nervous about it as I don’t understand coupon rates, accrued interest and how gilts work in general when held to maturity - and what if I changed my mind, can it be sold again in the same way I would buy now, what is the risk?.

I did notice your comment though that this TY25 could be attractive if not having to pay tax on the coupon, and this would be in my SSIP, but I don’t understand why it could be good? If you could possibly spend a few minutes giving me an idiots guide on how to understand and pick the right one I would be really grateful.

In a SIPP I would tend to favour a short term money market fund if you want to hold a cash like investment, rather than holding gilts directly. STMMFs that track SONIA give interest around 4.5%, which is free of tax in a SIPP and have very low volatility. Short term gilts are OK, but are more complicated and they have fixed maturity dates, which may not match with your plans.

You pays your money and you takes your choice. STMMF like CSH2 return 4.3% based on the last month's performance. Short term gilts are paying about 1% more.

Would be good to understand the drawbacks to having gilts in a SIPP - what is complicated assuming I’m fine with the fixed date? Thanks

To me, it seems counter intuitive to hold gilts within a tax shelter. They would be virtually tax-free anyway outside the shelter (if you pick a low coupon gilt).

Although there will be no tax within the SIPP as the gilt income & gains arise, you'll effectively be paying 15% if basic rate (20% Income Tax, with 25% tax-free) or 30% if higher rate (40% Income Tax , with 25% tax-free) when you drawdown the gilt growth out of the SIPP.

If you bought gilts outside the SIPP, then you'd pay minimal tax (just Income Tax on the 0.25% coupon). But if the cash is already inside the SIPP and you are just trying to find a short-term home for it until you reach 55, then that might not be an option.

Your reasoning is flawed as you're not accounting for tax relief on the way into the SIPP. That makes any gains within the SIPP effectively tax free as the extra tax you pay on the gain when withdrawing is more than offset by the gain itself being on a bigger amount.

Example £1000 invested outside SIPP, grows 10% to £1100, minus any tax on interest.

Instead put it in a SIPP, assume basic rate taxpayer, £1000 grossed up to £1250 with tax relief. Grows 10% to £1375. No tax on growth/interest inside the SIPP.

Withdraw £1375 with 15% tax (25% tax free and 20% tax on 75%), net £1168.75.

But in this case the cash is already in the SIPP and it's already received tax relief? The existing cash within the SIPP isn't going to receive any further tax relief if it is invested in gilts.

The point I was trying to make was that, ideally, it would be better to arrange things so the investments which would be tax free anyway outside a SIPP are placed outside the SIPP, and ones which would otherwise be taxable outside the SIPP are placed inside the SIPP. £1,000 gilts outside the SIPP, and £1,000 of otherwise taxable investments inside the SIPP is going to be more tax efficient than £1,000 gilts inside the SIPP and £1,000 of taxable investments outside the SIPP.

If additional pension contributions are a possibility, then obviously the whole £2,000 within the SIPP would be better still.

zagfles

spider42 said:

zagfles said:

spider42 said:

Workerbee999 said:

aroominyork said:

Doctor_Who said:

Workerbee999 said:

aroominyork said:

Johnjdc said:

Does anyone know why TY25 seems (if bought in a tax advantaged account) to be sticking out like a sore thumb in terms of being more generous than the yield curve?

https://www.yieldgimp.com/gilt-yields

It's interesting. First, put aside the question of whether late October 2025 is the sweet spot for gilt yields, ie the date the market expects the base rate to start falling. A high coupon gilt like TY25 seems a good investment if you do not have to pay tax on the coupon (either your income is within the personal tax allowance or you are tax-wrapped in a SIPP/ISA) but a bad place if you are a 40% taxpayer. So that seems to be reflected in the pricing - lower demand for this gilt (I would not buy it) pushes the price down and hence the gross yield up.

Hi. I’m new to gilts but looking at moving some of my HL SSIP (assuming they offer it) into this to de-risk as I’m 55 in Sep 2025 and want to start accessing around then (to fill the gap to DBs).I had seen TN25 mentioned a couple of times but just read your comment here, and the Oct 25 timing fits in with my timescale.

but I’m quite nervous about it as I don’t understand coupon rates, accrued interest and how gilts work in general when held to maturity - and what if I changed my mind, can it be sold again in the same way I would buy now, what is the risk?.

I did notice your comment though that this TY25 could be attractive if not having to pay tax on the coupon, and this would be in my SSIP, but I don’t understand why it could be good? If you could possibly spend a few minutes giving me an idiots guide on how to understand and pick the right one I would be really grateful.

In a SIPP I would tend to favour a short term money market fund if you want to hold a cash like investment, rather than holding gilts directly. STMMFs that track SONIA give interest around 4.5%, which is free of tax in a SIPP and have very low volatility. Short term gilts are OK, but are more complicated and they have fixed maturity dates, which may not match with your plans.

You pays your money and you takes your choice. STMMF like CSH2 return 4.3% based on the last month's performance. Short term gilts are paying about 1% more.

Would be good to understand the drawbacks to having gilts in a SIPP - what is complicated assuming I’m fine with the fixed date? Thanks

To me, it seems counter intuitive to hold gilts within a tax shelter. They would be virtually tax-free anyway outside the shelter (if you pick a low coupon gilt).

Although there will be no tax within the SIPP as the gilt income & gains arise, you'll effectively be paying 15% if basic rate (20% Income Tax, with 25% tax-free) or 30% if higher rate (40% Income Tax , with 25% tax-free) when you drawdown the gilt growth out of the SIPP.

If you bought gilts outside the SIPP, then you'd pay minimal tax (just Income Tax on the 0.25% coupon). But if the cash is already inside the SIPP and you are just trying to find a short-term home for it until you reach 55, then that might not be an option.

Your reasoning is flawed as you're not accounting for tax relief on the way into the SIPP. That makes any gains within the SIPP effectively tax free as the extra tax you pay on the gain when withdrawing is more than offset by the gain itself being on a bigger amount.

Example £1000 invested outside SIPP, grows 10% to £1100, minus any tax on interest.

Instead put it in a SIPP, assume basic rate taxpayer, £1000 grossed up to £1250 with tax relief. Grows 10% to £1375. No tax on growth/interest inside the SIPP.

Withdraw £1375 with 15% tax (25% tax free and 20% tax on 75%), net £1168.75.

But in this case the cash is already in the SIPP and it's already received tax relief? The existing cash within the SIPP isn't going to receive any further tax relief if it is invested in gilts.

The point I was trying to make was that, ideally, it would be better to arrange things so the investments which would be tax free anyway outside a SIPP are placed outside the SIPP, and ones which would otherwise be taxable outside the SIPP are placed inside the SIPP. £1,000 gilts outside the SIPP, and £1,000 of otherwise taxable investments inside the SIPP is going to be more tax efficient than £1,000 gilts inside the SIPP and £1,000 of taxable investments outside the SIPP.

If additional pension contributions are a possibility, then obviously the whole £2,000 within the SIPP would be better still.

Well exactly, you said "it seems counter intuitive to hold gilts within a tax shelter". It's generally better to have any investments, no matter what they are, in a SIPP rather than unwrapped. Unless you need access before age 55/57 (in which case access is the issue not tax).

Of course if you've reached any of the limits eg tax relief limit, annual allowance, LTA, and filled your ISA, and so you have no choice but to invest unwrapped, then low coupon gilts will be one of the more efficient investments to hold unwrapped.

coastline

Another detailed list here updated daily. If you select any of the headings. Coupon ,Maturity Date, Time to Maturity ,Price and Yield there's even more details. That + symbol opens each one up.

UK Gilt Prices and Yields (dividenddata.co.uk)

Bond Yield Calculator (dividenddata.co.uk)

ChilliBob

coastline said:

Another detailed list here updated daily. If you select any of the headings. Coupon ,Maturity Date, Time to Maturity ,Price and Yield there's even more details. That + symbol opens each one up.

UK Gilt Prices and Yields (dividenddata.co.uk)

Bond Yield Calculator (dividenddata.co.uk)

Both very useful, thanks Coastline  

Stargunner

coastline said:

Another detailed list here updated daily. If you select any of the headings. Coupon ,Maturity Date, Time to Maturity ,Price and Yield there's even more details. That + symbol opens each one up.

UK Gilt Prices and Yields (dividenddata.co.uk)

Bond Yield Calculator (dividenddata.co.uk)

Looking at that calculator, if you was to buy TR25 and hold until maturity it shows an annual return of 5.24%, which is very good. Less any dealing and platform fees.