Gilts vs Savings

Chandas

The Gilts vs Savings calculator in How gilts can help you pay less tax on savings interest doesn't seem there any more. Has it been withdrawn?

poseidon1

I was unaware MSE had such a calculator, but having now checked, it looks as if indeed the link to calculator has broken. Perhaps MSE moderators could look into this and respond accordingly?

BlueSky601

Thanks for posting Chandas. I cannot find the Gilts vs Savings Calculator either - it  seems to have been removed from the website. This is a pity because it was extremely useful in helping me to choose between a particular gilt or a savings bond

Wevewonitall

Gilts v savings missing calculator. Good morning i too have been trying to use the calculator which I have previously found very useful. I sent emails to the ‘brokenlink’ mse email grouping. I keep receiving emails back saying its being looked into by an automated email process.  An employee did reply to me initially saying the link looked fine, check my browser settings. But I dont think thats correct.  Waiting to hear back..

MSE_Stephen

Hi

We're looking into this

brucefan_2

MSE_Stephen said:

Hi

We're looking into this

Thank you! 

Wevewonitall

MSE  Many thanks for fixing this calculator link.  

Frequentlyhere

I'm probably being dim here, but I tried the calculator using the parameters for the currently available T53 gilt, and it told me

"Buy this gilt and if you keep it to maturity (in 2053),

Redemption yield:5.44%

• Total return (after any tax): £12,974.29
• Initial investment: £7,574.00
• Total you'll get back by 22/10/2053: £20,548.29

To match this, you'd need a savings account paying:

Condition	Rate
If you pay no tax on savings	3.62%
If you pay basic-rate tax	4.52%
If you pay higher-rate tax	6.03%
If you pay additional-rate tax	6.58%

"

So 5.44% matches what I've seen here too, so I thought i had this right and that that was the key comparable.

 I'm totally confused however as to why a savings account paying only 3.62% would be sufficient to match that. What have I missed? the mse calc is here btw

OldScientist

Frequentlyhere said:

I'm probably being dim here, but I tried the calculator using the parameters for the currently available T53 gilt, and it told me

"Buy this gilt and if you keep it to maturity (in 2053),

Redemption yield:5.44%

• Total return (after any tax): £12,974.29
• Initial investment: £7,574.00
• Total you'll get back by 22/10/2053: £20,548.29

To match this, you'd need a savings account paying:

Condition	Rate
If you pay no tax on savings	3.62%
If you pay basic-rate tax	4.52%
If you pay higher-rate tax	6.03%
If you pay additional-rate tax	6.58%

"

So 5.44% matches what I've seen here too, so I thought i had this right and that that was the key comparable.

 I'm totally confused however as to why a savings account paying only 3.62% would be sufficient to match that. What have I missed? the mse calc is here btw

Very strange. While the realised total return (i.e., with coupons reinvested) will depend on the price of the gilt each time a coupon is reinvested, assuming no changes in yield through the lifetime of the gilt, the yield is then a close enough approximation to the total return.

For example, assuming that T53 had a 5.4% coupon and a price of 100 (i.e., the yield was 5.4%), then, assuming no changes in yield or price, each year the return would be (1+5.4/200)^2=5.5% (semi-annual coupons hence the divide coupon by 2 and the square).

Just for fun(!), I calculated the price every 6 months assuming no change in yield and then calculated the annual return after reinvesting the coupons at the available price. Every year, the return also comes out at a shade over 5.4% (5.47%).

I've also just tried a quick internal rate of return (i.e., excel IIR function) calculation for T53 which suggested a return of 4.4% (although that is just with the cashflows).

I'm not sure what the calculator is doing, but the answers don't seem to be correct (at least for the no tax on savings case - unless the calculator applies tax to the coupons).

Frequentlyhere

Thanks @OldScientist - my only other thought is that maybe I put in one of the parameters incorrectly in the calculator, did you try it for yourself at all?

SnowMan

Frequentlyhere said:

I'm probably being dim here, but I tried the calculator using the parameters for the currently available T53 gilt, and it told me

"Buy this gilt and if you keep it to maturity (in 2053),

Redemption yield:5.44%

• Total return (after any tax): £12,974.29
• Initial investment: £7,574.00
• Total you'll get back by 22/10/2053: £20,548.29

To match this, you'd need a savings account paying:

Condition	Rate
If you pay no tax on savings	3.62%
If you pay basic-rate tax	4.52%
If you pay higher-rate tax	6.03%
If you pay additional-rate tax	6.58%

"

So 5.44% matches what I've seen here too, so I thought i had this right and that that was the key comparable.

 I'm totally confused however as to why a savings account paying only 3.62% would be sufficient to match that. What have I missed? the mse calc is here btw

You aren't being dim. There seem to be a number of fundamental methodological flaws with the MSE calculator and it should be withdrawn.

In producing those results you have chosen the input 'do you pay tax on savings interest' as 'no'.

What the calculator then does it appears is to ignore the reinvestment of coupons in coming up with the 'no tax on savings' figure of 3.62%pa. Clearly the reinvestment of coupons can't be ignored as it creates a significant undervaluation of the gilt, in particular because the compounding of interest on the savings account is allowed for 
Numerically the 3.62% is derived from solving the equation 7,574 x (1+i) ^ 28.1 = 20,548.29, where 7,574 is the initial investment and 20,500 is the sum of the face value of the coupons and the gilt maturity amount (with no deduction for tax in either case). So that's saying, if every time I am paid a coupon I put it in a non interest bearing account and pay the maturity amount into the same account, what is the interest rate I would require on a savings account where interest is not put into a non interest bearing account but is paid back into the account with interest on interest, for the savings account to be the same accumulated amount as the amount at maturity in the non interest bearing account.   

The 4.52% figure is just 3.62%/0.8, and the 6.03% figure is 3.62/0.6 and the 6.58% figure is 3.62/0.55 so it's just the no tax rate grossed up for tax.

So with your inputs we can only compare the 3.62% with the 5.44% redemption yield, in this scenario, or else there is a mismatch between the tax rate used for the gilt with the tax rate used for the savings. But we can't even do that because of the ignoring of reinvestment of coupons mentioned. Of course in this case of an always non taxpayer on interest, the interest rate needed on savings required over the 28 years is equal to the gross redemption yield of 5.44% (assuming coupons can be reinvested at 5.44% also).

If you were to change the 'do you pay tax on savings interest' to 'yes basic rate' then the calculator works out the maturity amount and adds in 80% (=100% - 20%) of the coupons, and then works out the return needed for the initial investment to equal the maturity amount + 80% of coupons. Again this is completely wrong as it ignores reinvestment of coupons and there is also a mismatch in all comparisons except the basic rate tax comparison. 

Perhaps the calculator is intended to only compare short term gilts against fixed rate savings accounts of the same term but it still is not a  good tool because of the approximations and because the lack of clarity it provides to the user in what the results mean.

Much easier to just use yieldgimp and pick up the grossed up equivalent yield, after setting the appropriate tax rate (0%, 20%, 40% or 45%) as this is the approximate gross savings rate required to match the gilt. Doing it that way there are still a few assumptions made there in relation to the reinvestment rate of the coupons and tax on the reinvestment of those coupons but as these are small amounts (because of the short period) the error should usually be acceptable for practical decision making. 

For longer term comparisons we need to be careful in that we are comparing short term interest rates on savings with long term interest rates implied by gilt yields. So really we are asking what very roughly is the average gross interest rate over time I will need on savings to match the gilt returns given my tax rate on interest.