Interactive Investor - calculation of 25% tax free cash when holding Index Linked Gilts

Lowtrawler

SnowMan said:

TheGreenFrog said:

zagfles said:

It's hardly any work, all they need to do is download the DMO spreadsheet here Index-linked Gilts in Issue and multiply the clean price by the index ratio. Even if it has to be done manually by someone with a calculator it should only take 10 mins as a one off, and maybe someone else to double check it. 

HL are interesting, they display the clean prices when looking at the SIPP value, so way undervalues IL gilts, but when you go into Drawdown Information they show the "arrangement value" as the real valuation ie based on the dirty price. So they are capable of valuing it properly. My SIPP is crystallised so not sure where you'd see this on an uncrystallised SIPP, but the fact they can value it properly when it matters, I suspect would mean they'd value it properly if you wanted to take tax free cash. 

Does multiplying clean by the index ratio get you the dirty price?  I thought maybe you need to factor in the accrued interest on top, although this will be a very small amount of the difference between clean and dirty on an ILG.  You could also take the dirty price from Tradeweb, which I think is what DMO refers you to for prices.

You do need to add in the accrued interest, but numerically it's very small compared to the indexation. 

Here to scale you can see the current position with the 3 month laggers. The official prices for yesterday's end of trading (clean, indexation and accrued interest) are available on tradeweb at noon today. Interactive Investor want to calculate the market value of the index linked gilt as the green column only, but it should include the white column (indexation) and red column (accrued interest).

For T27 for example it means that Interactive Investor are valuing at roughly half of it's actual market value. It's like they are valuing two bananas at the price of one banana, but are claiming as there is a banana price factored into their calculation their market valuation of the two bananas as being the cost of one banana is correct.

"within our terms and conditions, we state that we will value bananas using a price feed that we reasonably determine from independent banana providers or dealers in bananas, and hence we are entitled to value two bananas as the price for one banana because we have incorporated the official banana price, set out in the Banana Act 2004, into our calculations".

If Interactive Investor were to use just the clean price with indexation (green plus white columns) to value the index linked gilts and apply the 25% to that, then from a practical prospective that's fair enough in my opinion. But to use only the clean price is completely bananas.

Fully agree with this post but it is also an interesting point on the conventionals. I believe ii also fail to take into account the accrued interest on conventionals and this can make up a reasonable element of a conventionals market price - probably up to 2.35% for a 4.75% coupon bond. If you held £200k of a conventional 4.75% bond and withdrew the PCLS at the wrong time, you could end up losing more than £1k of the tax free lump sum.

TheGreenFrog

Lowtrawler said:

Fully agree with this post but it is also an interesting point on the conventionals. I believe ii also fail to take into account the accrued interest on conventionals and this can make up a reasonable element of a conventionals market price - probably up to 2.35% for a 4.75% coupon bond. If you held £200k of a conventional 4.75% bond and withdrew the PCLS at the wrong time, you could end up losing more than £1k of the tax free lump sum.

Yes they just quote clean on all gilts, but that is the convention.  I don't know wether there are platforms which allow specific assets to be moved into drawdown.  If so then you could perhaps stage the drawdown so that on conventional gilts for example you only move the gilt into drawdown immediately after the interest payment date. 

Lowtrawler

TheGreenFrog said:

Lowtrawler said:

Fully agree with this post but it is also an interesting point on the conventionals. I believe ii also fail to take into account the accrued interest on conventionals and this can make up a reasonable element of a conventionals market price - probably up to 2.35% for a 4.75% coupon bond. If you held £200k of a conventional 4.75% bond and withdrew the PCLS at the wrong time, you could end up losing more than £1k of the tax free lump sum.

Yes they just quote clean on all gilts, but that is the convention.  I don't know wether there are platforms which allow specific assets to be moved into drawdown.  If so then you could perhaps stage the drawdown so that on conventional gilts for example you only move the gilt into drawdown immediately after the interest payment date. 

I suspect many investors will not be sufficiently switched on to realise the impact. Unless people have substantial holdings and get unlucky with the timing, any impact is going to be slight.

Interactive Investor have acknowledged my complaint. Will let this thread know when they reach a conclusion.

QrizB

I have some relatively short conventional gilts in my SW pension but I'm planning to hold them to maturity so I don't think I'll have any clean vs dirty pricing problems.

Lowtrawler

QrizB said:

I have some relatively short conventional gilts in my SW pension but I'm planning to hold them to maturity so I don't think I'll have any clean vs dirty pricing problems.

It depends if you plan to take a Tax free lump sum from the overall pension before they mature. The issue I am having is that I am happy to hold the IL gilts to maturity but will be taking a PCLS (tax free lump sum) when I first enter into drawdown. Interactive Investor have confirmed they will value my pension pot using clean prices for the index linkers and so the value of the pot will be around £40k less than the value if they used the proper market prices (dirty). This will mean my tax free lump sum will be £10k less than it should be and so ultimately I will end up paying £4k extra tax.

Edit: Just noticed you said you were holding conventional gilts. They don't have the same quantum of problem as Index linkers, see posts from Greenfrog and myself above.

QrizB

Lowtrawler said:

QrizB said:

I have some relatively short conventional gilts in my SW pension but I'm planning to hold them to maturity so I don't think I'll have any clean vs dirty pricing problems.

It depends if you plan to take a Tax free lump sum from the overall pension before they mature.

I'm planning UFPLS withdrawals rather than taking the whole 25% upfront, and only as/when they mature. So I'll effectively be withdrawing cash.

Lowtrawler said:

Edit: Just noticed you said you were holding conventional gilts. They don't have the same quantum of problem as Index linkers, see posts from Greenfrog and myself above.

I agree entirely, this sounds like a bigger problem with linkers. Therehave been a couple of mentioned conventional gilts in the thread and I was trying to highlight the difference; I might've failed!

Lowtrawler

QrizB said:

Lowtrawler said:

QrizB said:

I have some relatively short conventional gilts in my SW pension but I'm planning to hold them to maturity so I don't think I'll have any clean vs dirty pricing problems.

It depends if you plan to take a Tax free lump sum from the overall pension before they mature.

I'm planning UFPLS withdrawals rather than taking the whole 25% upfront, and only as/when they mature. So I'll effectively be withdrawing cash.

I had originally been planning to go down the UFPLS route but, following the panic with Rachel Reaves budget, have concluded the 25% tax free may not be around forever. Through taking it up-front, I can avoid that uncertainty.

Nebulous2

I'm new to this - and may not know what I'm doing, but Charles Stanley gives me the dirty price. Different columns state; tax cost, market value, change in value, bid. 

The market value is equivalent to the number I have times the bid price. The tax cost shows what I paid.  

TheGreenFrog

Nebulous2 said:

I'm new to this - and may not know what I'm doing, but Charles Stanley gives me the dirty price. Different columns state; tax cost, market value, change in value, bid. 

The market value is equivalent to the number I have times the bid price. The tax cost shows what I paid.  

That is valuable intel @Nebulous2

Well done CS (and boo for the many others which only quote clean).  Maybe a solution for the OP?

Nebulous2

TheGreenFrog said:

Nebulous2 said:

I'm new to this - and may not know what I'm doing, but Charles Stanley gives me the dirty price. Different columns state; tax cost, market value, change in value, bid. 

The market value is equivalent to the number I have times the bid price. The tax cost shows what I paid.  

That is valuable intel @Nebulous2

Well done CS (and boo for the many others which only quote clean).  Maybe a solution for the OP?

I transferred my SIPP to Charles Stanley Direct as Fidelity didn't offer gilts and I wanted them. I'm getting cashback as well, but it isn't paid for 12 months. I imagine it is still available. 

Buying gilts requires a phonecall, you can't do it online, but it was quite straightforward, called, told the customer rep what I wanted and he put me through to the dealing room.