Explain Gilts/Bonds to me like I am 5 years old please?

GenX0212

DRS1 said:

Most of your pension is in a DC workplace pension.  Are you planning to leave it there or move it to a SIPP?

If leave it there, does it allow the sort of drawdown you want?

And assuming you build your gilt ladder inside the DC workplace pension does it allow you to hold individual gilts?

As it stands I will leave the workplace DC (LifeSight) pension where it is but will investigate transferring part of it (£100k) to a new SIPP for the Gilt ladder. It's performing OK at present and the charges are very low. It definitely does support Drawdown but I do have some research to do to ascertain exactly what options it provides; my preference being for UFPLS.

I don't believe the workplace DC scheme supports Gilts as such and of the existing SIPPs both only offer fairly simple options so I was envisaging transferring those to a new SIPP, again some further research needed.

Albermarle

GenX0212 said:

DRS1 said:

Most of your pension is in a DC workplace pension.  Are you planning to leave it there or move it to a SIPP?

If leave it there, does it allow the sort of drawdown you want?

And assuming you build your gilt ladder inside the DC workplace pension does it allow you to hold individual gilts?

As it stands I will leave the workplace DC (LifeSight) pension where it is but will investigate transferring part of it (£100k) to a new SIPP for the Gilt ladder. It's performing OK at present and the charges are very low. It definitely does support Drawdown but I do have some research to do to ascertain exactly what options it provides; my preference being for UFPLS.

I don't believe the workplace DC scheme supports Gilts as such and of the existing SIPPs both only offer fairly simple options so I was envisaging transferring those to a new SIPP, again some further research needed.

I am sure your workplace DC scheme does not support buying individual gilts ( or shares). I think more than 95% of workplace pension clients never move out of the default fund ( or are even aware of what it is). 
Interesting though that it seems only some SIPPs offer the ability to buy individual gilts.
HL, Aj Bell, II and Iweb seem to, but some others like Fidelity ( and others)  do not AFAIK.

QrizB

Albermarle said:

GenX0212 said:

I don't believe the workplace DC scheme supports Gilts as such and of the existing SIPPs both only offer fairly simple options so I was envisaging transferring those to a new SIPP, again some further research needed.

I am sure your workplace DC scheme does not support buying individual gilts ( or shares).

My workplace Group Personal Pension via SW does let you buy regular gilts (possibly not IL ones) or listed shares. I might be the only member of the scheme to ever do it, but it's an option!

GenX0212

OK I'm still researching and learning, be gentle with me!

Whilst I am not prepared to dive head first into the corporate bond market there are a few options on the A J Bell platform which have caught my eye offering short term bonds (e.g. out to ~5 years) with a higher coupon return than Gilts e.g. London Power Networks (part of UKPN) at 6.125, United Utilities at 5.625, Barclays at 5.75
(I know I have to factor in the purchase price and calculate the yields not just look at the coupon headline numbers)

Whilst nothing is ever guaranteed UK Regulated Utilities and Banks strike me as pretty safe bets, at least in the short-term, and highly unlikely to fail as such (I have spent my career in Utilities businesses and have a decent understanding of how they are funded).

To be clear I'm not interested in bonds trading as such, my purpose is to build a guaranteed level of income between retirement and State Pension which will allow my core DC pot to remain invested in the wider stock market.

Are there any particular things to watch out for if I decide to invest in some of these 'safer' bonds?

DRS1

All of them are priced at over 100.  Do you know if they pay back 100 on maturity?  If so that is a bit of a loss.

The LPN and UU ones have (VAR) in their names on HL.  I have no idea what that means (Variable??) and if it is something to worry about.

Some corporate bonds try to rollover on maturity into new bonds.  I have no idea if that might happen with any of these.

RogerPensionGuy

A previous post here said plenty of clever people work out the approximate value using dates, cost, coupons and balance the risk rewards on future interest rates.

I have few gilts 1 to 3 years maturaty and noticed they went up in price in the last week, I'm guessing people were thinking interest rates will be reduced more than previously though, however I read today due possible inflation, it's poss next rate move will be up.

I just hold gilts outside any tax shelter trying to mitigate tax a bit and handy cash if required. 

I think where gilts work best is for people on 40 & 45% income tax as gets most benefits.

Gilts and gilt ladders are pretty handy nice to have I'm finding. 

poseidon1

GenX0212 said:

OK I'm still researching and learning, be gentle with me!

Whilst I am not prepared to dive head first into the corporate bond market there are a few options on the A J Bell platform which have caught my eye offering short term bonds (e.g. out to ~5 years) with a higher coupon return than Gilts e.g. London Power Networks (part of UKPN) at 6.125, United Utilities at 5.625, Barclays at 5.75
(I know I have to factor in the purchase price and calculate the yields not just look at the coupon headline numbers)

Whilst nothing is ever guaranteed UK Regulated Utilities and Banks strike me as pretty safe bets, at least in the short-term, and highly unlikely to fail as such (I have spent my career in Utilities businesses and have a decent understanding of how they are funded).

To be clear I'm not interested in bonds trading as such, my purpose is to build a guaranteed level of income between retirement and State Pension which will allow my core DC pot to remain invested in the wider stock market.

Are there any particular things to watch out for if I decide to invest in some of these 'safer' bonds?

Governments gilts have a specific level of complexity related to understanding the benefits ( or otherwise) of investing in them, whilst corporate bonds are on an altogether other level of complication entirely.

For example you mentioned Barclays 5.75% 2026 has having caught your eye.

In the banking world that particular bond is known as subordinated tier 2 debt. Its purpose in the event of severe financial stress is to be sacrificed ( in other words investors lose their money) in order to prop up the bank's share capital. Tier 1 capital by contrast ranks far higher, and has greater call on business assets in the event of company failure.

From my perspective when looking at bank bonds, I have to decide whether I am being fairly rewarded ( by way of the interest rate offered) against the risk of the bond wipe out if the relevant trigger event arises.

It should not have escaped your notice that the bond was priced as high as 120p for the best part of 2021 compared to a mid price of around 100.52p to 101.29p over the last few trading periods. Understanding the complex fiscal factors behind the precipitous price fall  since 2021 ( and its previous steep rise ), is important when deciding when/if to invest and whether the price you pay fairly compensates you for the higher risk implicit within that particular bond strucure.

The blog below provides a more critical analysis of Tier 2 bond investment considerations

https://www.investopedia.com/

It is as well to note, you will only be able to invest in corporate bonds ( generally) with the main platforms after successfully  completing a complex investment/instruments questionnaire. The link below relates to HL's requirements in this respect.  I suspect you might agree that you are  not at the 'highly knowledgeable investor' stage as yet, for the purposes of the questionnaire.

https://www.hl.co.uk/shares/complex-instruments

GenX0212

poseidon1 said:

GenX0212 said:

OK I'm still researching and learning, be gentle with me!

Whilst I am not prepared to dive head first into the corporate bond market there are a few options on the A J Bell platform which have caught my eye offering short term bonds (e.g. out to ~5 years) with a higher coupon return than Gilts e.g. London Power Networks (part of UKPN) at 6.125, United Utilities at 5.625, Barclays at 5.75
(I know I have to factor in the purchase price and calculate the yields not just look at the coupon headline numbers)

Whilst nothing is ever guaranteed UK Regulated Utilities and Banks strike me as pretty safe bets, at least in the short-term, and highly unlikely to fail as such (I have spent my career in Utilities businesses and have a decent understanding of how they are funded).

To be clear I'm not interested in bonds trading as such, my purpose is to build a guaranteed level of income between retirement and State Pension which will allow my core DC pot to remain invested in the wider stock market.

Are there any particular things to watch out for if I decide to invest in some of these 'safer' bonds?

Governments gilts have a specific level of complexity related to understanding the benefits ( or otherwise) of investing in them, whilst corporate bonds are on an altogether other level of complication entirely.

For example you mentioned Barclays 5.75% 2026 has having caught your eye.

In the banking world that particular bond is known as subordinated tier 2 debt. Its purpose in the event of severe financial stress is to be sacrificed ( in other words investors lose their money) in order to prop up the bank's share capital. Tier 1 capital by contrast ranks far higher, and has greater call on business assets in the event of company failure.

From my perspective when looking at bank bonds, I have to decide whether I am being fairly rewarded ( by way of the interest rate offered) against the risk of the bond wipe out if the relevant trigger event arises.

It should not have escaped your notice that the bond was priced as high as 120p for the best part of 2021 compared to a mid price of around 100.52p to 101.29p over the last few trading periods. Understanding the complex fiscal factors behind the precipitous price fall  since 2021 ( and its previous steep rise ), is important when deciding when/if to invest and whether the price you pay fairly compensates you for the higher risk implicit within that particular bond strucure.

The blog below provides a more critical analysis of Tier 2 bond investment considerations

https://www.investopedia.com/

It is as well to note, you will only be able to invest in corporate bonds ( generally) with the main platforms after successfully  completing a complex investment/instruments questionnaire. The link below relates to HL's requirements in this respect.  I suspect you might agree that you are  not at the 'highly knowledgeable investor' stage as yet, for the purposes of the questionnaire.

https://www.hl.co.uk/shares/complex-instruments

Thank you. As I said still researching and learning and will read the links you have provided. At the basic level though, and correct me if I am wrong, a bond is pretty much a 'promise to pay' right? and barring a major financial event is about as good a guarantee that you can get.

As I said I'm interested in the 'safe' returns aspect. I know for instance that there is very little likelihood of UKPN or UU going to the wall in the next 5 years. UKPN in particular will likely grow significantly in the next five years because of the drive to Net Zero (whether or not we individually agree with it). Even if they start struggling then because of the regulatory funding mechanisms it would have to be something majorly catastrophic to risk a bond not repaying in that timescale. Look at the trouble Southern Water are in and yet there is still very little chance of their regulatory licence being pulled, they may be subject to regulatory penalties, even ordered to sell up to another utility but ultimately very unlikely to result in a total collapse.

GenX0212

DRS1 said:

All of them are priced at over 100.  Do you know if they pay back 100 on maturity?  If so that is a bit of a loss.

The LPN and UU ones have (VAR) in their names on HL.  I have no idea what that means (Variable??) and if it is something to worry about.

Some corporate bonds try to rollover on maturity into new bonds.  I have no idea if that might happen with any of these.

Hence why the yield is the important factor yes? A bond costing more than face (par) value but with a higher coupon can still potentially give a better return than a lower face value with lower coupon?

QrizB

GenX0212 said:

At the basic level though, and correct me if I am wrong, a bond is pretty much a 'promise to pay' right?

Yes.

GenX0212 said:

 and barring a major financial event is about as good a guarantee that you can get.

No.

The promise is only as good as the organisation that has made it.

Businesses go into administration all the time, and when they do their bondholders are amongst the losers. Or businesses might restructure their debts to avoid administration, again at the cost of their bondholders.

GenX0212 said:

As I said I'm interested in the 'safe' returns aspect. I know for instance that there is very little likelihood of UKPN or UU going to the wall in the next 5 years.

Lots of things might happen in the next five years to result in UU or UKPN being unable to pay their debts. That's one of the reasons their bonds give higher yields than UK Government debt (gilts) do.

Assigning relative risk ratings to bonds is a business in itself. See for example:

https://ratings.moodys.io/ratings