Thoughts on Bonds versus Stocks & Shares

bjorn_toby_wilde

I’m also looking to lock away some of the gains from equities but I have to be honest and say that I don’t know the best way to invest in bonds in my SIPP.

I don’t want to hijack the thread so I’ll start my own if necessary but are there any good online resources to help investors understand the process of buying bonds better?

Do you buy individual bonds/gilts or a bond fund.  How do you differentiate good bonds from bad? What are the mechanics of actually buying a bond or gilt in a SIPP?  These are the stumbling blocks for me.

Alexland

bjorn_toby_wilde said:

Do you buy individual bonds/gilts or a bond fund.  How do you differentiate good bonds from bad? What are the mechanics of actually buying a bond or gilt in a SIPP?  These are the stumbling blocks for me.

You can buy an individual bond and hold to redemption (it's market value may fluctuate along the way particularly on the longer dates ones) if you want absolute certainty of outcome or you can buy into a bond fund and accept it's an easy way to get exposure to an asset class' returns - although you can see the current portfolio you don't get certainty because the fund manager will have a certain amount of churn as bonds reach redemption new ones get purchased etc.

Hoenir

bjorn_toby_wilde said:

I’m also looking to lock away some of the gains from equities but I have to be honest and say that I don’t know the best way to invest in bonds in my SIPP.

I don’t want to hijack the thread so I’ll start my own if necessary but are there any good online resources to help investors understand the process of buying bonds better?

Do you buy individual bonds/gilts or a bond fund.  How do you differentiate good bonds from bad? What are the mechanics of actually buying a bond or gilt in a SIPP?  These are the stumbling blocks for me.

Perhaps a multi asset fund at the core of your portfolio would be beneficial. Investing can be made to sound and seem extremely simple. Peel away the layers and you'll begin to realise it's a complex world not an ATM. 

bjorn_toby_wilde

Hoenir said:

bjorn_toby_wilde said:

I’m also looking to lock away some of the gains from equities but I have to be honest and say that I don’t know the best way to invest in bonds in my SIPP.

I don’t want to hijack the thread so I’ll start my own if necessary but are there any good online resources to help investors understand the process of buying bonds better?

Do you buy individual bonds/gilts or a bond fund.  How do you differentiate good bonds from bad? What are the mechanics of actually buying a bond or gilt in a SIPP?  These are the stumbling blocks for me.

Perhaps a multi asset fund at the core of your portfolio would be beneficial. Investing can be made to sound and seem extremely simple. Peel away the layers and you'll begin to realise it's a complex world not an ATM. 

That’s probably the way I should go to reduce the complexity.

Good advice. Thanks.

incus432

bjorn_toby_wilde said:

Do you buy individual bonds/gilts or a bond fund.  How do you differentiate good bonds from bad? What are the mechanics of actually buying a bond or gilt in a SIPP?  These are the stumbling blocks for me.

A mix for me.

 I created a bond ladder in my SIPP lasting 6 years, which I will hold to maturity and will yield about 4.3%, I can either reinvest the proceeds as each matures or take as income. It was a doddle buying them in AJBell once i had used the ladder builder spreadsheet (by lategenxer) to know what I wanted (there was one gilt not available on the platform but a month change in the start date solved that). I also now hold short dated bond funds IGLS and GLT5 (0-5 year and 1-5 yr respectively) as well as some longer term VGOV (9.3 yr). for money I might need to access.  The former are much less volatile than the the longer bond funds

https://lategenxer.streamlit.app/Gilt_Ladder

This is a guide to bond fund yields (YTM)  - depends if you hold them in a tax shelter or not (if so,no. tax of any sort, but if not you would choose low coupons so the yeild is mostly capital gain and there is no CGT on gilts but you do pay income tax on the coupon income)

https://www.yieldgimp.com/

PS a couple of months ago I was as confused as you are by bonds. Take heart!

cfw1994

Dornfield said:

german_keeper said:

Apologies if I have missed it but are you currently taking full advantage of your PTA?

I'm still getting familiar with the terminology: PTA = personal tax allowance? Do you mean withdrawing £16,760 from the SIPP in each tax year (I have no other taxable ncome), meaning that withdrawal pays no income tax at all? £12,570 personal allowance and £4,190 as a 'tax free lump sum'. I am arranging that at the moment, before the end of the tax year.

Sounds to me like you might want to draw a bit more than just that out.  
Use some (perhaps all) of your 20% tax band.  
If you want to keep it saved, then shift to ISA funds, which you can get at with no tax issues : ready for when you are looking at cruises, or indeed to help fund offspring through Uni & beyond 🤷‍♂️
You would want to avoid a point where you do want more out & hit high rate tax…

Heck, you could even consider passing some down into JISA/ISA/pension for those pesky kids🤪

Hoenir

bjorn_toby_wilde said:

Hoenir said:

bjorn_toby_wilde said:

I’m also looking to lock away some of the gains from equities but I have to be honest and say that I don’t know the best way to invest in bonds in my SIPP.

I don’t want to hijack the thread so I’ll start my own if necessary but are there any good online resources to help investors understand the process of buying bonds better?

Do you buy individual bonds/gilts or a bond fund.  How do you differentiate good bonds from bad? What are the mechanics of actually buying a bond or gilt in a SIPP?  These are the stumbling blocks for me.

Perhaps a multi asset fund at the core of your portfolio would be beneficial. Investing can be made to sound and seem extremely simple. Peel away the layers and you'll begin to realise it's a complex world not an ATM. 

That’s probably the way I should go to reduce the complexity.

Good advice. Thanks.

Plenty of time to learn more before deciding to run your own portfolio. 

MarkCarnage

bjorn_toby_wilde said:

I’m also looking to lock away some of the gains from equities but I have to be honest and say that I don’t know the best way to invest in bonds in my SIPP.

I don’t want to hijack the thread so I’ll start my own if necessary but are there any good online resources to help investors understand the process of buying bonds better?

Do you buy individual bonds/gilts or a bond fund.  How do you differentiate good bonds from bad? What are the mechanics of actually buying a bond or gilt in a SIPP?  These are the stumbling blocks for me.

It sounds like you are wanting to move to a more defensive asset allocation rather than create a specific liability matching sub portfolio. If that's the case then as @hoenir suggests, a move to a multi asset managed fund strategy might be more appropriate to the extent you feel comfortable with. 

Dornfield

Sounds to me like you might want to draw a bit more than just that out.  

Use some (perhaps all) of your 20% tax band.  
If you want to keep it saved, then shift to ISA funds, which you can get at with no tax issues : ready for when you are looking at cruises, or indeed to help fund offspring through Uni & beyond 🤷‍♂️
You would want to avoid a point where you do want more out & hit high rate tax…

Heck, you could even consider passing some down into JISA/ISA/pension for those pesky kids🤪

That's a very interesting idea, cfw1994. A little bit off topic of Gilts and Bonds, but let's see if I can do the arithmetic (spoiler alert: I'm not sure I can):

Request for £50,270 withdrawal, 25% of which will be TFLS = £12,567.50, net £37,702.50 taxable income @ 20%

20% of £37,702.50 = £7,540.50 payable (ultimately, after claiming TFLS back from HMRC, as I presume they will take that in the first instance).  So net income from £50,270 withdrawal would be £42,729.50, and an effective rate of 15%.  

Does that sound about right?  Schoolboy errors?  Does that residual £37,702.50 still have a PA deduction to be made?  Is the taxable income really only £37,702.50 minus £12,570 = £25,132.5 @ 20% = £5,026.5 (= 10% effective rate on the £50,270 withdrawal).  That seems too good to be true.  I think I may have deducted the PA twice!

*Tax at 20% at source is unlikely.  Maybe higher, as I'm likely to be put on an emergency tax code, as I am not working and HMRC lost interest in me two years ago = no tax return required.  No current tax code that I'm aware of.

Albermarle

 (ultimately, after claiming TFLS back from HMRC, as I presume they will take that in the first instance). 

The TFLS is a completely non taxable payment and the provider will pay it in full.
It will not register at all on your personal tax account.

You may well pay more tax than necessary on the taxable part, especially if you take it all in one month, but this is easily reclaimable.