New to Gilts. I have a few questions before buying.

solidpro

So is it appromately 3.89% each year for 4 years, not compounding, and so is that equal to just 15% in the final year less the tax? That's probably a dumb way of looking at it, but we all make sense of things in different ways...

Albermarle

necronom said:

I must be misunderstanding, as I thought the TR29 one would give close to 10%, as I'd make £11 per gilt, would gain a bit from the coupon amount, then lose a bit on charges.

You would gain £11.25 from the gilt price and over 4 years about £3.50 from the coupon minus 20% tax = £2.80

So £14.05 on an investment of £88.75 = 15.8% 
Divided by 4 years = a return of 3.95% per year. ( OK the other poster said 3.89% - my maths might not be spot on but its close) 
You can get a 4 year fixed rate savings product paying 4.27%., minus any tax due.

InvesterJones

Albermarle said:

necronom said:

I must be misunderstanding, as I thought the TR29 one would give close to 10%, as I'd make £11 per gilt, would gain a bit from the coupon amount, then lose a bit on charges.

You would gain £11.25 from the gilt price and over 4 years about £3.50 from the coupon minus 20% tax = £2.80

So £14.05 on an investment of £88.75 = 15.8% 
Divided by 4 years = a return of 3.95% per year. ( OK the other poster said 3.89% - my maths might not be spot on but its close) 
You can get a 4 year fixed rate savings product paying 4.27%., minus any tax due.

I used yield gimp for the gross redemption yield (which is now 3.91% with today's fluctuation), but as you say, close enough.

OP, yes, it's annualised, same as inflation of 3.8% is per year. If that remains, then over four years your money would be worth something like 15% less than it is worth now, but your gilt will have increased by ~15.8% (just using the above), so the value is more or less treading water.

jifmoose

An irrelevant but amusing side-note (well, amusing to me at least) - I always thought that "strip" gilts were so called because the principal had been "stripped" of the coupon. At least some sources reckon it's an acronym for "Separate Trading of Registered Interest and Principal" including this court document. Sounds a lot like a retrospective backronym to me!

OldScientist

MyRealNameToo said:

May want to call them gilts, guilts are something very different and not something you can exactly invest in. 

UK defaulted in 1932, arguably twice if you count the arbitrary changing of the coupon rate on the 1917 "war loan" gilts. 

A bit OT but...

The conversion of the 5% war loan 1929/47 (i.e., callable at par after 1929) to the 3.5% War Loan perpetual gilt ('consol') callable after 1952, has by some been labelled as a default, some as a technical default, and some as the natural outcome of being a callable bond (holders could cash out or accept the new bond). According to the prospectus the 5% War Loan was "redeemable at par on 1 June 1947 but HM government reserve to themselves the right to redeem the loan at par at any time on or after the 1st June 1929 on giving three months notice." I'm not entirely sure whether the 3 months notice was given or not.

The default on a unmarketable debt to the US was caused by the German default - my understanding is that the UK lost far more in defaulted loans to other countries than they defaulted on and, according to Hansard, the US was kind enough to not actually consider it a default (my understanding, possible incomplete, is that there was international agreement of a moratorium on outstanding war debt because of the great depression).

Altogether, 1932 was a bit chaotic with the bank rate dropping from 6% to 2% over the first 6 months of the year.

necronom

Thanks everyone for the info.  I thought it sounded too good to be true.
I think I'll just leave my money in bank accounts/fixed bonds, etc.  I'll probably try a S&S ISA next April instead of a cash one (which I usually do).
I've just retired, so I think I'll be able to get £17,570 tax free interest now (the £12,570 + £5,000 since I have no other income) and maybe the usual £1,000 on top of that, so it's not worth going down the gilt route unless it was clearly better.

poseidon1

necronom said:

Thanks everyone for the info.  I thought it sounded too good to be true.
I think I'll just leave my money in bank accounts/fixed bonds, etc.  I'll probably try a S&S ISA next April instead of a cash one (which I usually do).
I've just retired, so I think I'll be able to get £17,570 tax free interest now (the £12,570 + £5,000 since I have no other income) and maybe the usual £1,000 on top of that, so it's not worth going down the gilt route unless it was clearly better.

Just to add, although the benefit of TR29 is probably marginal for 20% tax payers, the tax free capital gain over 4 years probably makes far more sense to us in the 40%/45% tax bands.

With annual CGT exemptions at a miserly £3,000, low coupon gilts looking more and more appealing to higher rate tax payers.

cwep2

necronom said:

Thanks everyone for the info.  I thought it sounded too good to be true.
I think I'll just leave my money in bank accounts/fixed bonds, etc.  I'll probably try a S&S ISA next April instead of a cash one (which I usually do).
I've just retired, so I think I'll be able to get £17,570 tax free interest now (the £12,570 + £5,000 since I have no other income) and maybe the usual £1,000 on top of that, so it's not worth going down the gilt route unless it was clearly better.

Generally speaking, for Gilts and Premium bonds, the (risk free) returns are not bad but very beatable if you pay no tax on interest, are close to break even for 20% tax payers (but add complexity and illiquidity and are generally less convenient than a standard savings account), but are useful for 40/45% tax payers. Of course even 45% tax payers can get tax free returns within an ISA so really this means for 40/45% tax payers who have already utilised ISA allowances.

Albermarle

cwep2 said:

necronom said:

Thanks everyone for the info.  I thought it sounded too good to be true.
I think I'll just leave my money in bank accounts/fixed bonds, etc.  I'll probably try a S&S ISA next April instead of a cash one (which I usually do).
I've just retired, so I think I'll be able to get £17,570 tax free interest now (the £12,570 + £5,000 since I have no other income) and maybe the usual £1,000 on top of that, so it's not worth going down the gilt route unless it was clearly better.

Generally speaking, for Gilts and Premium bonds, the (risk free) returns are not bad but very beatable if you pay no tax on interest, are close to break even for 20% tax payers (but add complexity and illiquidity and are generally less convenient than a standard savings account), but are useful for 40/45% tax payers. Of course even 45% tax payers can get tax free returns within an ISA so really this means for 40/45% tax payers who have already utilised ISA allowances.

and filled up their Premium bonds maybe !