Money Market vs Gilt Fund (again)

Victorwelldue

I've asked similar question couple of years back but thought worth getting an up to date perspective…

My pension pot currently has 70% equities, 20% money market fund, 10% UK gilts fund (containing mix of medium to long term gilts). The gilt fund is basically all that is available from my workplace pension in terms of gilts/bonds.

The pot overall has performed well over past couple of years but I'm concerned the cash element is getting too large and will only continue to grow as I stopped buying the gilt fund a few years back but continue to buy the money market fund. The only other option seems to be start buying the gilt fund again which I'm not sure is a good idea either? (and I don't want to be any higher than 70% equities).

I estimate I will start drawing down from the pot in around 4 to 6 years time.

If it comes down to a coin toss because no one knows what will happen with interest rates etc then I can probably live with that and will just carry on as is, but just want to make sure I'm not making an obvious blunder by doing so?

Would appreciate any thoughts 🙂

InvesterJones

What's the concern with the cash element getting larger?

Victorwelldue

https://forums.moneysavingexpert.com/discussion/comment/81927737#Comment_81927737

Just that its a large part of my pot unlikely to keep pace with inflation over the longer term. But maybe that's not the correct way to think about it and I need to think more about the pot overall with the cash element being a hedge against larger equity drops?

MK62

You hit the nail with your comment about it being a coin toss, as nobody can possibly know what will happen with inflation and interest rates over the next 4-6 years. As things currently stand you should get a slightly better return from a gilt fund, but it's very unlikely inflation and interest rates will stay as they are for the next 4-6 years. Given your stated constraints and requirements, I'd be inclined to split the difference and go for 15% in each of MMF and gilt fund.......it won' t give the best outcome, but it won't be the worst either.

DRS1

You say a "gilt fund" but do you know what sort of gilts it holds? In my very old personal pension I had a choice of two gilts funds one called Fixed (which held conventional gilts) and one called Indexed (which held index linked gilts). A simple soul like me might think that the Indexed one would protect you against inflation but I am sure someone who knows about these things will be able to explain why that ain't necessarily so (something to do with it being a fund and not an individual gilt held to maturity).

masonic

https://forums.moneysavingexpert.com/discussion/comment/81928508#Comment_81928508

In a nutshell because index linked gilts have opposing forces within them. There is the inflation protection, which means they rise in value in line with RPI/CPIH, but there is also the interest rate sensitivity, which causes them to fall when interest rates rise (which happens when inflation rises). Interest rate sensitivity is proportional to the time to maturity (which ends up at zero if you hold to maturity). You cannot hold a fund to maturity. When you sell, you'll be selling gilts with a range of maturities, some of which could have fallen quite hard if inflation and therefore interest rates have recently picked up. As we saw post-Covid.

The good news is that it has never been easier to hold gilts directly (of either flavour). It is also usually quite straightforward to partially transfer out of a workplace pension to a SIPP that would allow such direct holdings. So this is an option to consider if interested in keeping pace with inflation while holding something low risk.

leosayer

Given the above, is there any situation where holding an index-linked gilt fund is a better option than holding IL gilts directly?

masonic

https://forums.moneysavingexpert.com/discussion/comment/81929453#Comment_81929453

It would have been better between 2008 and 2021, assuming you then sold out. That was a pretty unusual period for interest rates.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/81929453#Comment_81929453

If ILG yields fall (which as @masonic said was generally the case between 2008 and 2021).

If simplicity is required, a fund is marginally simpler than running a rolling ladder of gilts.

The difference between a relatively short duration fund (e.g., the ishares up to 10 year index linked gilt fund) and an equivalent rolling ladder will be minimal. Of course, collapsing ladders (i.e., where the maturing gilts are spent) are different beast.