Gilt ladder

SVaz

Given that interest rates are mooted to fall to around 3.25% by the end of next year,  I’m thinking of getting a gilt ladder in my Sipp for the years 2028- 32 for my early retirement phase .  I’ve currently got £40k in a STMM fund and add income from other funds ( £1500ish annually at present) . 

 I will want £48000 income over 4 and a half years, which is looking to cost me £39600 at todays gilt prices.  My DB pension is inflation linked and we have savings and my Wife’s Sipp so I don’t really need to index link the gilts. 

Do I buy the 4 gilts all in one go now, ( average 4.2% coupon) or over the next couple of years as a hedge against interest rates not falling that fast?  Will the Gilt price rise if/when interest rates fall?   Will it make much of a difference?

If I also wanted to do say, an 8 year gilt ladder from 2033,   I  assume index linking it would be a good idea.  It will only be for around £3k yearly.  It would be to use up the remaining tax free cash in my Sipp. 

InvesterJones

Yes, gilt prices usually rise when interest rates fall - how much is governed by their duration. Gilt prices may fall due to global or UK events too though. I don't tend to think of speculating with gilts - if the return is enough for my needs then I get them, without worrying that I might have got even better if I'd waiting - I might not after all.

SVaz

Good point.  

Hoenir

SVaz said:

Given that interest rates are mooted to fall to around 3.25% by the end of next year,  

People moot many things. Whether they materialise is another matter. Whether it be the direction of inflation or interest rates the assumptions have been hopelessly wrong for the past 3 years. 

MK62

SVaz said:

Given that interest rates are mooted to fall to around 3.25% by the end of next year,  I’m thinking of getting a gilt ladder in my Sipp for the years 2028- 32 for my early retirement phase .  I’ve currently got £40k in a STMM fund and add income from other funds ( £1500ish annually at present) . 

 I will want £48000 income over 4 and a half years, which is looking to cost me £39600 at todays gilt prices.  My DB pension is inflation linked and we have savings and my Wife’s Sipp so I don’t really need to index link the gilts. 

Do I buy the 4 gilts all in one go now, ( average 4.2% coupon) or over the next couple of years as a hedge against interest rates not falling that fast?  Will the Gilt price rise if/when interest rates fall?   Will it make much of a difference?

If I also wanted to do say, an 8 year gilt ladder from 2033,   I  assume index linking it would be a good idea.  It will only be for around £3k yearly.  It would be to use up the remaining tax free cash in my Sipp. 

The only way to be sure to lock in today's yield-to-maturity on gilts is to buy them today.........in the future, that YTM may go up or down, nobody really knows (on a daily basis it's a coin toss really -  the expected trend is downwards.....but that could be wrong of course)
The main point of a gilt ladder is certainty of return, so if that's what you want and the numbers work for you, then personally I'd buy now........if the numbers work, they work.....yes, you might get a better YTM tomorrow, next week, next year, who knows, but you might also get worse, and then maybe then the numbers won't work any more.

PS, the coupons aren't really the main thing with a gilt ladder....it's the yield, specifically the yield to maturity (YTM). 
A good site for info is https://www.yieldgimp.com/gilt-yields
If you have a play with the gilt ladder builder here.....https://lategenxer.streamlit.app/Gilt_Ladder   you'll often find it using lower coupon gilts.....the maturity date and YTM are the key things.

leosayer

If you want certainty over your income for some years into the future then a gilt ladder is a great way to do it. Unlike an annuity you have the option of selling if your circumstances change.

My wife is about to do this with her SIPP - to create £16,760 per year income for the next 6-7 years until her DB pension starts.

There's no point trying to predict where interest rates will go and when. You just need to be comfortable that you won't get upset if interest rates rise after you have bought the gilts. 

threads76

Is there any downside to buying gilts on the day or days shortly after a gilt matures - for example, today and TN25?

Does the fact that the large amount of freed-up money today, for people quite likely to reinvest back into a low-coupon gilt, drive up the prices?

leosayer

No.

Gilts are freely traded globally in huge quantities. If there were any such opportunities then traders would take full advantage.

TheGreenFrog

threads76 said:

Is there any downside to buying gilts on the day or days shortly after a gilt matures - for example, today and TN25?

Does the fact that the large amount of freed-up money today, for people quite likely to reinvest back into a low-coupon gilt, drive up the prices?

The low coupon gilts tend to trade at a slightly lower YTM than equivalent maturity high coupon gilts.  Presumably because they are in higher demand as a result of tax advantages for individuals.  As the low coupon gilts (such as TN25) mature the supply becomes more constrained and so while the tax advantage remains enticing it is reasonable to assume that the YTM spread between low and high coupon gilts of equivalent maturity will continue to increase.  So if all private individuals holding TN25 roll into T26 on maturity that will have an effect on T26 YTM - but it will be very small and (on a related point) given that you will lose a bit on the spread if you sell shortly before maturity of a gilt your loss may not be covered by the saving you make by buying the replacement gilt just before everyone else rolls into that gilt.

SVaz

So TN28 is a better buy than TE28 ?

TheGreenFrog

SVaz said:

So TN28 is a better buy than TE28 ?

Currently yes, if you are basic rate tax payer or above and assuming you don't need an income until maturity.