Low risk funds/ideas for cash lump sum

Vitor

Two obvious things to look at are:

Short-dated gilts, especially low-coupon ones. The coupon is taxable, but the uplift to maturity is generally a capital gain, and gains on gilts are tax free. That can make them much more tax-efficient than cash or money market funds for a 40% taxpayer.

Using a spouse’s allowances, if applicable. If your spouse pays tax at a lower rate, holding some of the money in their name can make a big difference, whether for savings interest, CGT allowance or ISA use. Transfers between spouses are normally straightforward for tax purposes.

aroominyork

https://forums.moneysavingexpert.com/discussion/comment/81934205#Comment_81934205

Coming back to my T29 question, how do prices change in line with changing inflation expectations? Say inflation expectations across the three year period to maturity suddenly rises by 3% from 4% to 7%; for simplicity's sake assume the base rate does not change. How does it affect the price of the equivalent conventional gilt which becomes less attractive, and the ILG which becomes more attractive? Will the adjustments result in the real yield remaining around 0.199%?

masonic

https://forums.moneysavingexpert.com/discussion/comment/81939774#Comment_81939774

Inflation expectations don't change in isolation. For example, a rise in inflation expectations can go hand in hand with a reduction in confidence in the currency or asset class in general. In general, what we've seen in this episode is both ILG and conventional gilts become less attractive, the latter much more so than the former. Equities have also become less attractive against a backdrop of potential stagflation. And within that shift the UK is particularly vulnerable due to its energy insecurity.

The only way to know what the real yield on ILG will be going forward is to purchase them to lock in today's real yield. Mine are now starting to tick into the red in price terms, but that is inconsequential if I hold them to maturity, and I'm not unhappy with the real yield I locked in at, even if I might have been able to hold out for a little more (at risk of seeing whatever I held in the interim slide). I'm certainly pleased I didn't opt for conventional at that time.

aroominyork

Thanks, masonic. The reason I am asking is because I bought T29 last August with a view to holding to maturity. We are now thinking of gifting some money to our kids (it needs to be done this calendar year) and the gifts would eat into our cash buffer, so I am re-planning our income sources for the next 2-3 years and selling unwrapped T29 would be an easy option. So I am wondering whether/how Iran-related inflation expectations have been priced into T29 over the last month? Since its dirty price has risen an annualised 4.46% since purchase I see no such jump, which seems a little curious, but perhaps I am not taking into account that gilt yields generally have risen since August. I am confused about how to consider the forward prospects of T29.

masonic

The beauty of ILG is the inflation expectations are priced into the index linking part, so in isolation they don't affect the price much - investors already get compensated for inflation risk. The price is likely to be most affected by matters of a political nature.

aroominyork

Sorry, I don't understand. If I own an ILG whose coupons and price reflect inflation, and future inflation expectations suddenly rise, shouldn't someone wanting to buy it from me pay a premium? And since the dirty price hasn't jumped, where is that premium?

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/81939888#Comment_81939888

You've got opposing forces here - inflation expectations in the short term have risen, but so have interest rate expectations. The pull between them for the remaining duration results in the current demand. At worst you should be able to see that the price has not fallen as much as conventional gilts did, so the inflation linking has worked.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81939888#Comment_81939888

As InvesterJones says, ILGs broadly tread water, while a discount is demanded of conventional, whose cashflows fall behind a notional newly auctioned gilt. A new investor now has a choice between a much more attractive conventional gilt vs a much the same ILG. If the market has done its job, then they should not be significantly swayed in their preference. I was swayed a little bit away from ILG, although I didn't act on it, despite your kind offer.

aroominyork

So if I benchmark a similar duration conventional gilt such as TG29 which has risen about 0.4% since I bought T29 in August, TG29 has gained 0.65% annualised while T29 has gained 4.46% annualised. Would I then be right to say that with three years to go until maturity, that difference of 3.8% reflects a 3.8%/3 = 1.3% increase in average annual inflation expectations?

masonic

https://forums.moneysavingexpert.com/discussion/comment/81940386#Comment_81940386

Not really. In Aug 2025, T29 had a real YTM of around 0.75% vs today's value of 0.12% (the clean price has increased from around 98p to £1). Most of that is due to inflation/interest rate expectation changes, but some is due to the shortening duration (pull to par). Likewise with TG29's increase from YTM 3.9% in Aug 2025 to 4.3% today. The difference in YTM vs rYTM at a given timepoint gives you the implied inflation at that timepoint. For Aug 2025 that would be 3.9% - 0.75% = 3.15% and for now it would be 4.3% - 0.12% = 4.18%, so about a 1.0% increase, but with a caveat that we are comparing 3.5 year gilts in Aug 2025 with 3 year gilts today. Over a longer time period you'd aim to find a gilt at the later timepoint with a similar duration and coupon.

You'll probably remember that the BoE publishes https://www.bankofengland.co.uk/statistics/yield-curves , including implied forward inflation, with an archive of historic data, where the methodology addresses some of the above issues.