Index linked gilts and index linked annuities: are you moving money into them, yea or nay?

MarkCarnage

Ciprico said:

Snowman, I also have steered away from ILG as never understood them, though having just retired have invested heavily in short term Gilts and am curious about ILG.

I understand it is true to say that if you hold to maturity, and you buy at parity, you get the coupon (generally low) + RPI (unknown)

...but as you can't buy at parity, and the price you pay has a lot if the RPI element baked in (dirty price ?) - how do you get any certainty...

....apart from the coupon is all the gain capital gain (tax free)

ILGs are not the perfect hedge against inflation, but they are the best thing we've got. I agree with previous posters that over the long term, equities have tended to provide decent inflation protection. However, there are no contractual guarantees. 
Linkers aren't a perfect inflation hedge as firstly there is a small time lag between the reference date for inflation calculation and the date at which it's applied...this is 3 months in the UK and used to be 8 months. They are also a hedge against inflation as defined by the RPI basket, which may differ significantly from individual's inflation experiences of their own basket of goods. 
Both the coupon and the principal are index linked to RPI to maturity. Saying that inflation is unknown is beside the point, as what you are trying to do is take as much of that unknown risk out of future cashflows as possible.  

The 'dirty' price for linkers essentially reflects the accrued inflation baked in to both principal and coupon (the actual calculation mechanism is a bit more complex but that's a decent summary). Not sure what you mean about not getting certainty? You are essentially getting the inflation uplift from the date you purchase to maturity date.
The price you pay reflects the real yield today for that specific ILG. 

What you may find is that the path to maturity could be pretty volatile as we have seen in recent years as real yields have normalised again. Long dated ILGs can and have been more volatile than equities....which is unsurprising as they are both very long duration assets and hence very sensitive to changes in real interest rates. 

There was no logic for individual investors to be buying ILGs for a number of years prior to 2022....unless they were willing to pay a premium in the form of a negative real yield for the certaintly of inflation outcome. Now that longer dated ILGs are yielding about 2% again, there is some incentive, though bear in mind that real yields of 3-4% were the norm in the 80s/90s. 

Like conventional gilts, ILGs suffered from the financial repression of QE for over a decade, but they got hit harder as their duration is longer on a like for like basis. Institutions were also essentially forced buyers to hedge their future liabilities, and became pretty price insensitive for an extended period. 

And yes, only the coupon payment is taxable (as income). No CGT. 

Fink_Nottle

I have found this (and others on the subject on here) a very useful thread, and the last 3 posts @MarkCarnage, @SnowMan and @TheGreenFrog summarise things really well (thank you). 

I can understand why people get confused though, as there are few things we buy in life where the prices most commonly quoted are nowhere near what we pay. Even the terminology (clean and dirty) is off-putting, suggesting that we'd be dabbling in some under the counter grey market. Also, although the macro-economic discussions about what affects prices / yields are interesting, I'm not sure they're essential to understanding the bigger question for ILGs in particular - i.e. what do I get for my money?

If you want a reliable income which (generally) keeps up with prices, I think it can be well worth spending a few hours reading about ILGs  (or watching on YouTube if that's your thing) to get a grip on all this because they a great option in the right circumstances. (Mine are similar to one or two others on here: I have a couple of DB pensions, a few DC pots, and I have - just last week - used funds from one of the DC pots to buy an ILG ladder provide a bridging income until SP kicks in. Real yield over 7 years should be a small positive - but I'd have settled for zero. That makes sense for me and matches my risk appetite.)

For me, there a few very minor downsides, which I've chosen to accept.
1. There's a reasonable chance that my equities will outperform the gilts. Yes, but there's a risk that they won't, and this is a hedge.
2. My personal rate of inflation might outstrip the headline rates. Perhaps, but it hasn't over the last few years.
3. The process for buying them is long! (At least it was with II, who make you ring them. 7 purchases, 1 hr 15m!). But the agent doing it was very nice, it was a one-off and now it's done.

I've tried to go in with my eyes open and if I've made a suboptimal choice, I'll only have myself to blame.

QrizB

Fink_Nottle said:

3. The process for buying them is long! (At least it was with II, who make you ring them. 7 purchases, 1 hr 15m!). But the agent doing it was very nice, it was a one-off and now it's done.

Is that specific to index-linked gilts? Or specific to IIs SIPP?

I ask because I bought some conventional gilts in my II SSISA a couple of years ago, and it was no different to buying any other fund or share.

MarkCarnage

QrizB said:

Fink_Nottle said:

3. The process for buying them is long! (At least it was with II, who make you ring them. 7 purchases, 1 hr 15m!). But the agent doing it was very nice, it was a one-off and now it's done.

Is that specific to index-linked gilts? Or specific to IIs SIPP?

I ask because I bought some conventional gilts in my II SSISA a couple of years ago, and it was no different to buying any other fund or share.

Buying conventionals is generally a lot easier through platforms. Linkers still seem very much as an institutional asset class...and with some reason, given that many retail investors don't really understand conventional gilts, never mind linkers! 

Also, to note that the terminology 'clean' and 'dirty' price also applies to conventionals, but is more straightforward to define and calculate for them. It's pretty similar to !!!!!! and ex dividend for shares in principle. 

MarkCarnage

For me, there a few very minor downsides, which I've chosen to accept.
1. There's a reasonable chance that my equities will outperform the gilts. Yes, but there's a risk that they won't, and this is a hedge.
2. My personal rate of inflation might outstrip the headline rates. Perhaps, but it hasn't over the last few years.
3. The process for buying them is long! (At least it was with II, who make you ring them. 7 purchases, 1 hr 15m!). But the agent doing it was very nice, it was a one-off and now it's done.

In response...

1. At real yields of 1-2% for linkers, you'd hope that your equities would outperform them over reasonable time periods. At real yields of minus 2% for linkers it was a no brainer. Your thinking is right that linkers are a hedge that pay you a modest real return at present. 

2. Not a lot anyone can do about that except monitor and change their spending if they can.

3. I agree...see my separate comment. It's slowly getting better. However, I think that some platforms have some justifiable concerns that retail investors know and understand what they are doing here! 

MarkCarnage

I have found this (and others on the subject on here) a very useful thread, and the last 3 posts @MarkCarnage, @SnowMan and @TheGreenFrog summarise things really well (thank you). 

@Fink_Nottle (and others) you might find this of interest in relation to equities v ILG and how the dynamics have changed.

https://fowlerdrew.co.uk/financial-advice/back-to-the-old-normal-the-fowler-drew-model-in-a-post-qe-world/

Fink_Nottle

QrizB said:

Is that specific to index-linked gilts? Or specific to IIs SIPP?

I ask because I bought some conventional gilts in my II SSISA a couple of years ago, and it was no different to buying any other fund or share.

I believe that most (maybe all?) nominal gilts can be traded online with II (as per QrizB's experience) regardless of which account type you have, but when you ask for a quote for ILGs the website tells you that they can only be traded over the phone. Also the process seems to be a bit different for 3 month gilts vs 8 month gilts.

And then when they all land in your account, it shows that you've made a whopping loss because their value is listed at clean price! So long as the number of units is what you're expecting, I guess it doesn't matter. It does feel like a process from another century.

TheGreenFrog

ii's contract notes for ILGs are incorrect and add the inflation uplift to the accrued interest - this is a bit of a pain when you are calculating amounts for your tax return under the accrued interest rules.  ii at least now recognise this and will provide you with a proper breakdown by secure message.   Although the last breakdown they provided to me was wrong.  Another point to note, if you are making large trades, is that ii charge £40 dealing fee for trades of £100k or more.  Add to this the telephone procedure for buying through ii.  So I now trade ILGs through iWeb:  £5 dealing fee, dealt by leaving instructions which are actioned within minutes (so it is bought at best, but in my experience you are never given a proper price when telephone dealing on the retail platforms so end up dealing at best) and accurate contract notes!

Note:  above the inflation uplift I refer to is the uplift to the capital

Storcko14

TheGreenFrog said:

ii's contract notes for ILGs are incorrect and add the inflation uplift to the accrued interest - this is a bit of a pain when you are calculating amounts for your tax return under the accrued interest rules.  ii at least now recognise this and will provide you with a proper breakdown by secure message.   Although the last breakdown they provided to me was wrong.  Another point to note, if you are making large trades, is that ii charge £40 dealing fee for trades of £100k or more.  Add to this the telephone procedure for buying through ii.  So I now trade ILGs through iWeb:  £5 dealing fee, dealt by leaving instructions which are actioned within minutes (so it is bought at best, but in my experience you are never given a proper price when telephone dealing on the retail platforms so end up dealing at best) and accurate contract notes!

Note:  above the inflation uplift I refer to is the uplift to the capital

Just to add that this £40 fee applies to all instruments on ii not only to linkers as I learnt to my cost.  Breaking your trades into sub £100k chunks, whilst a pain, solves this.  Also the telephone deal price for linkers is the same as the online cost for other instruments.  

zagfles

Fink_Nottle said:

3. The process for buying them is long! (At least it was with II, who make you ring them. 7 purchases, 1 hr 15m!). But the agent doing it was very nice, it was a one-off and now it's done.

That is mad! I made about 8 purchases with HL when setting up my IL gilts ladder, it was over the phone but only took around 20 mins.