Short Term Gilts

flopsy1973

aroominyork said:

Yes, a gilt is the UK equivalent of a US Treasury. You can buy them, like Doctor_Who explained he has, and like I (in TN25) and many others have too. Your understanding is correct that you pay very little tax if you buy a low coupon gilt, since the capital gain is tax free.

So I have been pondering to buy 100k of these also given I have used my PSA allowance or do use 6 month bond which will generate more interest given I won't pay tax on the gilts ? 

aroominyork

flopsy1973 said:

aroominyork said:

Yes, a gilt is the UK equivalent of a US Treasury. You can buy them, like Doctor_Who explained he has, and like I (in TN25) and many others have too. Your understanding is correct that you pay very little tax if you buy a low coupon gilt, since the capital gain is tax free.

So I have been pondering to buy 100k of these also given I have used my PSA allowance or do use 6 month bond which will generate more interest given I won't pay tax on the gilts ? 

A six month bond suggests you want the capital in six months. Is that right? The closer a gilt matures compared to when you want your capital, the greater the chance you will get the current yield. TN24 matures in just under six months and has a lovely low 0.125% coupon, see https://www.dividenddata.co.uk/uk-gilts-prices-yields.py.

flopsy1973

What I need in equivalent taxable saving account to get that yield 

InvesterJones

flopsy1973 said:

What I need in equivalent taxable saving account to get that yield 

The same 0.125% (both are taxable).

The point of buying such a low coupon is not the yield, but the discounted price so when it matures in 6 months you get the face value, and a capital gain which in the case of gilts, doesn't get hit by capital gains tax.

Edit: Confusing myself with terms now, sorry. At the above link the yield given includes the capital gain, so 4.867% on TN24. That's practically all capital gain. Equivalent for a taxable account would depend on your tax rate, something like 6.075% for basic rate.

Bobajobbob

You can buy (and sell) these with HL. Very easy. Also look at the YieldGimp website for a good overview of prices and yields to maturity.

Aminatidi

OK so some homework later and I think I've got my head around these.

Next question.

I have £120K in an unwrapped account at HL.

I think I'll pop £20-30K of that in FTSE Global All Cap and transfer it to Vanguard.

If I want to pop the remaining £90-100K in 100% safe UK short duration gilts but I also want the optionality not to risk too much if I needed to cash in some or all of them.

I don't anticipate needing to do this but this is my "ballast" where I want my cake and eat it of safety with some return.

How far ahead would people be comfortable going right now in terms of duration?

* TN24
* TN25
* T26
* TN28
* TG29

Are all low coupon so decent tax free capital gains to be made but whilst I now think I basically understand gilts I'm not confident I understand how much pressure future interest rate rises or falls will exert on (say) T26 onwards.

masonic

Aminatidi said:

Are all low coupon so decent tax free capital gains to be made but whilst I now think I basically understand gilts I'm not confident I understand how much pressure future interest rate rises or falls will exert on (say) T26 onwards.

Pressure? If you bought any gilt and held it to maturity, your total return would be locked in on day 1, so it wouldn't matter what happened in the interim. The price of your gilt will be £100 when it matures come what may, so if you buy any individual gilt and hold to maturity, then you'll be fixing your return. What you cannot know, and nobody can help you to know, is what will happen to interest rates after you lock in your rate. If they go into double digits and stay there for a while, then clearly your gilt investment might not look so attractive in hindsight, but if they peak soon at around 6% and fall back in the coming years, you'll probably be happy.

You always have the option to sell your gilts early, but the price someone would be willing to pay for them will depend on the outlook for interest rates at the time you sell. This is also unpredictable, beyond saying that you can expect to pay more the worse the rate you locked in looks based on contemporary interest rate expectations and the length of time rates are predicted to be above previous expectations.

Aminatidi

Pressure is probably the wrong word

The way you explained it is how I understand it i.e. unless you're a forced seller your return is locked in so long as you hold to maturity.

With TN24 and TN25 I'm making an assumption that they are short enough duration that there is very little that should cause them to be too volatile and as you say so long as you hold to maturity your return is locked in at the time of purchase.

What I'm not sure of and what I probably articulated really badly is how far out you have to go in terms of duration until the potential for volatility might be a little too much for a "cash proxy".

I suspect there's no right answer to that one as everyone will have a different appetite for volatility.

masonic

Aminatidi said:

What I'm not sure of and what I probably articulated really badly is how far out you have to go in terms of duration until the potential for volatility might be a little too much for a "cash proxy".

I suspect there's no right answer to that one as everyone will have a different appetite for volatility.

The volatility is irrelevant though if you hold to maturity. Compare with a fixed term savings account that does not permit access. You might be able to log in and see a nice stable balance online a couple of months after you open it, but it is worth nothing in that moment, because you cannot access it. If a secondary market was created for fixed term savings accounts where the rights and benefits could be transferred between savers for any mutually agreed price, would this make them more risky?

Aminatidi

I think my problem (there are lots ) is that I don't know how long I'm prepared to "fix" for so I'm trying to have my cake and eat it.

As I said I'm not sure there is a right answer but my gut reaction is I'm not sure I would want to venture much beyond TN25 right now.

But I also don't know if my thinking is flawed using a fixed term savings account as a frame of reference.

It's quite funny in a way because roll back a year or two and I'd have said people are killing for a guaranteed 4% return that's 100% government backed and now it's easy enough to get and I'm not sure how long I want to lock the money in for.