Is what I am doing sensible? What would you do

af1963

If you buy a gilt ( index linked or otherwise) and hold it to maturity, you know what you will receive, in one of two ways:

with an indexed gilt, you'll receive the amount you invested, indexed for inflation, plus the "real yield" at the purchase date - which can be negative, but at the moment is almost always positive . (Some of this yield will come in the form of coupons while you hold the bond, which are also indexed, but ILG coupons are generally small). The actual cash amounts you'll receive are unknown but their value is known.

with a conventional gilt, you'll receive what you invested, plus the "yield to maturity" - again, some of this return comes as coupons, and for some gilts, the coupon is a significant amount. In this case you know the actual cash amount you'll receive for each coupon and at maturity, but you don't know how that will compare with inflation.

Coupons are treated as income ( interest ) for tax purposes. Gains on the purchase price are not, and are also exempt from CGT

As a quick example, index linked TG36 currently has a real yield around 1.6%.

Non indexed T36N has a yield to maturity of around 5%..

If inflation averages 3.4% over the 10 years till they both mature, they'll give equivalent returns. If inflation is higher, the index linked bond will return more.

Also: T36N sells for £99 at the moment and will return £100 if held to maturity. There is almost no capital gain - the return comes from teh regular 4.875% coupons,

TG36 sells for (clean price) £86 and will return (clean price) £100. (Both figures will be indexed for inflation to produce the actual "dirty" prices paid). So there's a £14 capital gain which makes up most of the return, since the coupons are only 0.125%.

Storcko14

Define 'too badly'! It depends on your expectations for inflation. A 10 year horizon leaves plenty of time for a real erosion of spending power and the US/Israel - Iran war is unlikely to be disinflationary. If you're happy to accept the risk of losing value in real terms then STMM are probably easier to understand and manage, otherwise if you want to protect against inflation as best you can then look at ILGs.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81978077#Comment_81978077

Are you able to explain the last sentence a little more please - perhaps with a simple worked example. I read the link but still not quite understanding how a IL gilt held until maturity can result in a loss.

hara____

https://forums.moneysavingexpert.com/discussion/comment/81979964#Comment_81979964

Based on the penultimate sentence, it's only saying that if you buy a linker when real yields are negative then you are buying a loss in real terms. Imagine someone purchased a linker in 2020 when some had real yields of -3%. And for convenience let's say that inflation turns out to be 3% between the purchase and maturity. If they invested £10,000 then they will get that same £10,000 back at maturity, because the real yield has offset the inflation linking. Their real loss would be 3% per year.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81980273#Comment_81980273

Two things - using the example above, am I right in thinking that the negative yield on purchase is due to the purchase (dirty) price being high due to market forces etc.?

Secondly, if inflation rises above 3% over the lifetime of the ILG then I'd be quits in. In actuality - if it rises above the break even point.

Storcko14

First point - I find it easier to think about the clean price, i.e., relative to par, when assessing whether an ILG is expensive or cheap. The dirty price is all about accrued interest and particularly indexation so, although you could figure it out (cheap or expensive), it's opaque since it depends a lot on the elapsed time since the gilt was issued.

Essentially if RPI is above the break-even point then you'd have been better off with an ILG over a conventional gilt, all else being equal.

For me, holding ILGs is not so much about whether I'm quids in or not though. It's about protecting the value of a chunk of cash that I'd rather not see munched by inflation if it does in fact spike.

BTW - Monevator (and sorry if I'm over-plugging!) has a great article today about the long term value of cash. Worth the OP reading this.

https://monevator.com/cash-total-returns-a-long-run-index-for-diy-investors/

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81980476#Comment_81980476

Thanks for that. I plumped for ILG as I do indeed primarily value protecting what I have. As an aside, I do believe inflation will rise - hence the ILG.

My concern was not particularly making a return - although that would be nice - rather not making a loss and seeking to understand how that loss may come about.

Mistermeaner

thanks all I’ll read the latest monevator link, that content has been very useful

I’m kind of prepared to jump - later today I’m planning to open a sipp with interactive investor and transfer 200k from my workplace pension into with a view to buying some index linked gilts. As pension access for me will be around 2037/38 I’ll aim for ones that mature then

one thing I still don’t understand is how to determine whether a ilg is being sold as discount or premium

the ‘clean price’ isn’t what you pay so doesn’t matter

the ‘dirty price’ includes accrued interest and also it’s inflationary adjustment since launch which could be years ago so I get will be substantially different …. But how do you tell if market forces have pushed a premium or discount on to it

also who is selling ? If all the wisdom is hold to maturity who is the other side of the trade ?

they seem almost too good to be true, uk government default aside , that you can’t lose with these things (not gain I suppose)

NoMore

Your mistake is thinking the clean price doesn’t matter. The clean price is quoted precisely for the reason to tell if it is at a discount or not, If the clean price is below par then it’s at a discount. You can use the clean price to compare different gilts as obviously the accrued interest for each gilt will be different making comparison difficult, removing that makes it possible.

The can’t lose, really only applies if you hold to maturity.

hara____

@Mistermeaner take a couple of linkers close to your investing horizon as examples:

T38 has a clean price of £99.2 and a coupon of 1.75%. So what is our real return? We'll get a small gain from the clean price increasing to £100 on maturity but most of our real yield comes from the coupon. This all fits with the real yield being quoted as 1.8%

TG36 has a clean price of £85.5 and a coupon of 0.125%. So what is our real return? We'll get most of it from the clean price increasing to £100 on maturity, this works out to about 1.5% annualised, and then we have the tiny coupon adding a little more. The real yield is quoted at 1.6%

So if you think in real terms, you can get everything you need to know about any premium or discount via the clean price and the coupon. If you started with the dirty price you would first have to remove inflation indexing to then be able to do the comparisons outlined above.

By the way, if you are opting for ii, be aware of the limitations compared to AJ Bell: I think you still to phone to trade linkers and ii will show you the clean price in portfolio valuations after you have paid the dirty price, falsely indicating a large loss on some linkers.