Fixed rate savings vs gilts

phlebas192

DRS1 said:

With yieldgimp I think you can play with the tax rates underlying the grossed up equivalent.  So you can see the difference between holding in an ISA (0% tax) and holding outside if you pay 20%, 40% or 45% tax.  I may be wrong about that though: I haven't used yieldgimp since they went on the app.

The web version was reinstated a while back. You have to register to use it, but it's free. And, yes, you can set your income tax rate on both the web & app versions.

lagransiete

i guess another alternative would be to invest in a money market fund to run in tandem with tracker global fund

slinger2

Came across this thread in a search and was wondering if things have changed recently.

I took out a 6% 3-year fixed rate deal with RCI in August 2023. When I look at T26A is seems that it was offering a yield of about 4.8% at that time. At the moment the best 3-year deal is about 5.2% but when I look at TR29 it's yield is currently about 4.9%.

All seems to make gilts a more attractive option for me (relative to fixed rate savings) than it has been.

I'm a 20% taxpayer with taxable interest of about £5k currently. As the years go by I can get more into ISAs but I'm expecting to be taxed on my interest for a few years yet (if I live that long). Also the tax rate on interest is rising to 22%. I'm over 70.

Thoughts?

wmb194

https://forums.moneysavingexpert.com/discussion/comment/82149956#Comment_82149956

5.2% - 20% = 4.16%

For a 20% taxpayer the overall net annual yield to redemption on TR29 looks to be about 4.7% and will reduce only slightly at 22%. Coupons are taxed as interest but the capital gain at maturity is exempt from CGT.

If you don't need the monthly or annual interest from the savings bond I'd go for the gilt. You can buy it for £5 via SWSD (nee iWeb) with no annual account fees.

Another advantage to the gilt is that you can sell it during London market hours and as time moves closer to its maturity date its market value will trend towards its redemption price ("pull to par").

https://giltsyield.com/bond/?settlement_delay=T%2B1&tax_rate=20

PixelPound

https://forums.moneysavingexpert.com/discussion/comment/82149956#Comment_82149956

I guess you need to look at a few calculations

£10K in a 3 year fixed account at 5.2% earns £1,642.53 in interest. If currently earning £5K in interest then you're above the PSA, so the interest net of 20% tax is £1,314.03 (rounding up).

Compare this to a conventional gilt in general account (taxable) and looking at TR29 with 0.875% coupon and maturity date of 22 Oct 2029. Current dirty price (price plus accrued interest) is £89.27, meaning £10K gets you 112.02 gilts. The annual interest (paid as two coupons) is £98.02 meaning total interest is £343.06 (gross) or £274.45 after tax. At maturity you would have a capital gain of £1,201.97, which is CGT free. So total after taxes is £1,476.42.

So that's a difference of 1.624% over the 3 years.

You could also try a 2030 gilt too, so everything isn't maturing at once. TG30 matures a year later and has a coupon of 0.375% (so lower taxable element), £44.70 annual interest (gross) but total after the 4 years of £2,079.86 after tax.

The downside is if the money is needed before maturity. You can easily sell but as most of the gain is at maturity, you are very much at the mercy of the markets. That said as their price has an inverse relationship to bank rates, a slash in interest rates would boost their price if you needed to sell because of whatever caused the BoE to slash rates.

slinger2

https://forums.moneysavingexpert.com/discussion/comment/82150135#Comment_82150135

Thanks for the detailed calculation. Fits in with my estimates: net yield 4.68% (tax rate 20% at https://giltsyield.com/bond/TR29 compared to 4.16% (net). Difference 0.52%. With 22% tax rate the difference is somewhat bigger.

Certainly doesn't tempt me to go for a fixed rate product at the moment.

spmoney4

But won't the tax rate be 22% from next April?

slinger2

https://forums.moneysavingexpert.com/discussion/comment/82150965#Comment_82150965

That's right. Unless something changes in the budget.

Anyway I've gone for the 5-year horizon and bought some TG31. Grossed-up yield 6.24% according to giltsyield.com (using 22%). Just a bit of variety for me having sold my CSH2.