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

af1963

MeteredOut said:

af1963 said:

Grok - out by a factor of 100 on the clean price, thinks you can buy £100 nominal for £1.0158 .  Yes please, I'll have some at that price  ... 

Good illustration of how AI can generate pages of plausible looking analysis, complete with notes and explanations, which is completely wrong., and yet sound 100% confident in its answer.

Grok (and other generative AIs) are text prediction engines - they do not "think".

But they can be a great addition to a financial toolbox, so long as you're careful and specific with your prompts, and always question the responses.

That's absolutely right. Should probably have "thinks" in scare quotes, as it's really an analogy along the lines of "my car beeps when it 'thinks' I'm parking too close to the one in front" . But the name "Artificial  Intelligence" deliberately suggests otherwise, and lots of people put too much trust in their output.

It's not confined to Grok. Couple of years ago as a test, I asked one of the other AIs to calculate take home pay for someone working full time on min wage - after tax, NI, pension contrib.  After each wrong answer, I said I thought it was wrong, and why, and asked it to re-check  - and got a different wrong answer. Repeated about eight times before it got it right. But unless you already know the answer, how would you know that ?

SouthCoastBoy

Just been looking at gilts and their charges, they don't seem much better value, after charges, than a fixed rate cash isa. Currently can get about 4.3% ? Am I missing something?

QrizB

SouthCoastBoy said:

Just been looking at gilts and their charges, they don't seem much better value, after charges, than a fixed rate cash isa. Currently can get about 4.3% ? Am I missing something?

You can only put £20k per year into an ISA. You can hold millions in gilts in a pension or GIA.

4.3% interest on cash ISAs is a relatively new phnomenon, and it might not last; meanwhile you can guarantee a gilt return for the next 40+ years, if you wish.

You can't get "RPI+2%" in a cash ISA.

GenX0212

SouthCoastBoy said:

Just been looking at gilts and their charges, they don't seem much better value, after charges, than a fixed rate cash isa. Currently can get about 4.3% ? Am I missing something?

I have put about £115.5k into an index linked gilt ladder to give me a guaranteed RPI inflation proof ladder as a bridge to SP. 

It will pay £15k a year index linked for 8 years. September RPI came in at 4.5%, I have already maxed out this years ISA allowance and will be using my ISA allowance for the next couple to convert cash from a recent inheritance into S&S ISA.

SouthCoastBoy

QrizB said:

SouthCoastBoy said:

Just been looking at gilts and their charges, they don't seem much better value, after charges, than a fixed rate cash isa. Currently can get about 4.3% ? Am I missing something?

You can only put £20k per year into an ISA. You can hold millions in gilts in a pension or GIA.

4.3% interest on cash ISAs is a relatively new phnomenon, and it might not last; meanwhile you can guarantee a gilt return for the next 40+ years, if you wish.

You can't get "RPI+2%" in a cash ISA.

But can I get rpi +2% from a gilt, after charges? I've been looking at the gilt prices plus running interest and I don't see such returns? 

If you hold the gilt outside an isa or pension you will also need to pay tax on the interest don't you, so no different to holding cash outside an isa?

BobR64

SouthCoastBoy said:

If you hold the gilt outside an isa or pension you will also need to pay tax on the interest don't you, so no different to holding cash outside an isa?

This is why you would tend to favour low coupon gilts outside a tax efficient wrapper. In that case most of the yield comes from the gain on maturity and that is free of CGT.

Secret2ndAccount

SouthCoastBoy said:

But can I get rpi +2% from a gilt, after charges? I've been looking at the gilt prices plus running interest and I don't see such returns? 

If you hold the gilt outside an isa or pension you will also need to pay tax on the interest don't you, so no different to holding cash outside an isa?

TR56 is priced at 55.8     If you hold it for 31 years you will make 78% which annualises at 1.9%. This will be increased by inflation, so inflation + 1.9%.  It pays 0.125% annualy so there's inflation + 2%. Very little tax to pay since the coupon is very small.
I could buy this for a fiver on iWeb, and hold it for free. 
Returns are only guaranteed if you hold for 31 years, though you would likely be able to sell earlier and get approximately the expected returns, plus/minus market conditions
Short term - 0-2 yr maturities only pay inflation + 1ish. Perhaps only worth it if you are a higher rate tax payer, or have a substantial amount to invest.

MetaPhysical

SouthCoastBoy said:

Just been looking at gilts and their charges, they don't seem much better value, after charges, than a fixed rate cash isa. Currently can get about 4.3% ? Am I missing something?

I am not an expert but as I see it, there are two answers.

1. If within a SIPP or ISA then Gilts act as a "safe" diversification from equities and cash in the event of a stock market crash.  The likelihood of a government defaulting on its gilts is small - though not an impossibility.  So 4-5% return, whilst not going to set the world on fire with excitement,  is useful income/growth still if held within a SIPP/ISA.  It is true that MM funds can also pay that, and they have a place in your portfolio too.  But they can also get into difficulty in some rare circumstances.  Diversification is the key word, especially as you approach or are retired where you may not be able to weather a stock market crash.  A blend of equities, bonds, MM funds and cash offers this diversification.  Some will say commodities and real estate also should play a part.

2. If you have to hold money outside of a SIPP or ISA, maybe because you have no allowances left that year, what are you going to invest your money in in a tax efficient way? Many withdrawing large TFC sums will face this choice.  Equities, MMF funds and cash will be subject to 20,40, 45% (or higher) tax.  At higher marginal tax rates you will not even keep pace with inflation.  Low coupon gilts are very useful because you do not pay CGT on the capital gain when they mature. Sure you can still hold equities in the GIA but what if they crash?  Short term gilts again offer useful diversification and growth of 4-5.5% upon maturity.  The big joker in the pack here is what if "Economist Reeves" decides to remove that CGT exemption from gilts?  ie. the government starts to tax its own debt!!!!

QrizB

MetaPhysical said:

The big joker in the pack here is what if "Economist Reeves" decides to remove that CGT exemption from gilts?  ie. the government starts to tax its own debt!!!!

I would guess that gilt prices would fall, yiends woud rise and the cost of public sector borrowing would increase. Which is probably not seen as a desirable outcome.

tigerspill

GenX0212 said:

I took the plunge and started converting my two smaller dc pots into index linked gilts as of today. This will guarantee ~£14k on top of my DB pension of £13.5k until SP kicks in. My main pot of £610k+ is staying invested in stocks and shares.

If you don't mind me asking, which ILGs did you go for?