Filling the gap to state/db pension using an index linked bond ladder in SIPP - how?

Universidad

Helpful thread, thanks @michaels - you're continually just a few years ahead of all the tricks I want to try

coyrls

OldScientist said:

michaels said:

najan49 said:

This is my current understanding which could be way out!

£97.85 is the clean price, you will actually pay the dirty price which is about £151.30.

The redemption price would be 100 * RPI at (22 Dec 2023) / reference index (242.42ish)

if the RPI stayed the same between now and December (it won’t) the input value for RPI would be 376.4 and so the redemption price would be about £155.26. Plus a tiny coupon.


Actual reference index is on the prospectus here: https://www.dmo.gov.uk/media/dlvn3pc5/pr021012b.pdf
RPI is here https://www.ons.gov.uk/economy/inflationandpriceindices

So do we know what the clean price represents?  Is it some sort of rebasing?  What tells us that the current real yield is +0.5% or whatever as per Old Scientists posts?

Plus again how do we model the coupons?  Seems to me there is probably a spreadsheet out there already with all this stuff in it.

On iweb (where I hold my ILG), the price paid is the nominal one, but the current price listed is the real one, so on a cursory glance all the bonds appear to have a huge loss - annoyingly, this means that I have to manually calculate the nominal prices (I only do this every  6 months when I am about to withdraw money and since I'm holding to maturity it doesn't really matter). To be fair to iweb, each time you purchase ILG, they do tell you of this idiosyncrasy in their reporting (I assume it is because they scrape the current price off of the LSE).

I hold ISGs with Halifax Share Dealing and Interactive Investor and the pricing idiosyncracy you describe is the same.  As you say, it it likely that they are picking up the clean prices quoted by the LSE and they don't calculate the dirty price.

OldScientist

coyrls said:

OldScientist said:

michaels said:

najan49 said:

This is my current understanding which could be way out!

£97.85 is the clean price, you will actually pay the dirty price which is about £151.30.

The redemption price would be 100 * RPI at (22 Dec 2023) / reference index (242.42ish)

if the RPI stayed the same between now and December (it won’t) the input value for RPI would be 376.4 and so the redemption price would be about £155.26. Plus a tiny coupon.


Actual reference index is on the prospectus here: https://www.dmo.gov.uk/media/dlvn3pc5/pr021012b.pdf
RPI is here https://www.ons.gov.uk/economy/inflationandpriceindices

So do we know what the clean price represents?  Is it some sort of rebasing?  What tells us that the current real yield is +0.5% or whatever as per Old Scientists posts?

Plus again how do we model the coupons?  Seems to me there is probably a spreadsheet out there already with all this stuff in it.

On iweb (where I hold my ILG), the price paid is the nominal one, but the current price listed is the real one, so on a cursory glance all the bonds appear to have a huge loss - annoyingly, this means that I have to manually calculate the nominal prices (I only do this every  6 months when I am about to withdraw money and since I'm holding to maturity it doesn't really matter). To be fair to iweb, each time you purchase ILG, they do tell you of this idiosyncrasy in their reporting (I assume it is because they scrape the current price off of the LSE).

I hold ISGs with Halifax Share Dealing and Interactive Investor and the pricing idiosyncracy you describe is the same.  As you say, it it likely that they are picking up the clean prices quoted by the LSE and they don't calculate the dirty price.

Useful to know - someone upthread mentioned HL doing the same, so it appears many (all?) platforms do the same. I have not been able to find a source of 'live' dirty prices for ILG (although sharecast might be a source and the tradeweb ones are a day or two in the past), although the formulae at the DMO (again linked upthread) allow that to be calculated. When I was buying them, I used a spreadsheet to calculate an up-to-date dirty price from the clean one which got close enough (while it isn't essential, it is useful as check that no major pricing errors have been made by the broker/marketmaker).

michaels

Universidad said:

Helpful thread, thanks @michaels - you're continually just a few years ahead of all the tricks I want to try

The alternative is a fixed duration index linked annuity but it seems one would need to speak to a broker/ifa to get costs for these.  The advantage of a linkers ladder is obviously that the funds are not lost on early death.

The good news is that with real returns currently being slightly positive the rule of thumb that you can fill the gap to SPA using a lump sum equal to number of years x current state pension is valid for retirement modelling purposes.  Eg when I retire the gap might be a total of 20 years (for example at my current planned retirement date 8 for DW, 12 for me) so I can deduct £212k from my sipp balance before looking at SWR, buying a lifetime annuity or whatever route I want to go down.  Similarly for DB.

michaels

OldScientist said:

Here's an example using the libreoffice yield function (TR31)



This is using the closing price on 21 July 2023 (from tradeweb - it requires a login, but registration is free, the DMO outsourced this to tradeweb a while back) of the ILG maturing in 2031. The tradeweb yield was 0.438% (to 3 decimal places) - I think I haven't quite got the settlement date over a weekend right in my calculation, but it is close enough. Remember these are real yields for this particular gilt.

The advantage of implementing this yourself is that you can put the current offer price for TR31 (see https://www.londonstockexchange.com/live-markets/market-data-dashboard/price-explorer?categories=BONDS&subcategories=14 ) of 98.05 (as at 09:08 today) into the spreadsheet to get an updated yield (approx 0.37%).

So I am looking at the last link in my ladder for 2036, the 22 Nov 36 0.125% bond, current clean price is 92.87 and according to the calculator YTM is 0.699%.

Suppose I want to replace my state pension payment in 2036 (as I won't get it until 2037) so would need £10,600 (in current pounds) so I purchase £9844.22 of the bonds (10600 x 92.87 / 100) - is this correct?

Next I need to worry about 2035, I can do the same calc for the 2035 linker but will also get two coupons from the 2036 gilt that year so will need slightly less.  The nominal coupon is 0.125% but I need to work out what this will be in terms of how much less of the 2035 bond I will need to buy to give me a real terms £10,600.

Any tips on how to do this part of the calculation?  Thanks

najan49

I think it’s £9844.22 x 0.125% = £12.30. So in 2035 you need £10600 - £12.30 = £10587.70