Gilts vs Savings

vnmsr

Hi all,

I was using MSE Gilt Calculator yesterday and I am struggling to follow the comparison to the savings accounts.

Let's use the attached example: This Gilt would earn £22.31 return on an investment of £4980 over 45 days (7 Sep till 22 Oct).

1. Take the first 'if you pay no tax on savings': 5.51% of £4980 over 45 days is £33.83 i.e. (5.51% x £4980) x (45/365). If someone pays no tax on their savings, they would receive the full £33.83 in their savings account. Surely this line should quote the same interest rate as the Gilt yield, which is 3.66% in this case?

3. Similarly, surely someone who is on higher-rate tax of 40% would need to earn savings interest of 6.06% to get the same yield? If they did, they would have earned £37.21 over 45 days i,e. (6.06% * £4980) x  (45/365). And would have paid 40% tax of £14.88, leaving them with £22.33, which is what they get from this Gilt. Whereas MSE calculates that they would need to earn 9.19% interest to match this Gilt.

What am I missing? Any advice on where I'm going wrong with this calculation would be very helpful!

Thank you!

zagfles

Yes it's clearly wrong - suggest you tell them using the "report a problem" button.

Newbie_John

You've put a wrong price - clean price instead of dirty (with acquired interests).

Put 99.75 instead of 99.6 and it will match your expectations.

Very short term gilts like this dont make much sense in my opinion, you also need to add possible platofrm buy/sell/keep fees - but thats not related to your question.

SnowMan

https://forums.moneysavingexpert.com/discussion/comment/82130666#Comment_82130666

Don't think that's right. There is nothing in the instructions to tell you to put the dirty price and it implies it is the clean price that needs entering (as it says that it is the clean price that is listed on investment platforms and so implies that is the one required by the calculator). And if you do put the dirty price the gross redemption yield is wrong.

If you put the clean price the gross redemption yield is about right at 3.66%, but the conditional rates based on tax rates are wrong. The conditional rates are in the right 'proportion' but seem to be working from a gross redemption yield of over 5% rather than the 3.66%.

So reporting it to MSE is the way to go. Please let us know the outcome.

Woodstok2000

https://forums.moneysavingexpert.com/discussion/comment/82130666#Comment_82130666

The numbers still look wrong....

Linton

Gilts pay interest twice a year and at maturity so you get up to 6 months interest rather than 45 days. The difference is included within the dirty price, ie capital gain or loss. Gilt capital gains are ignored for tax purposes. Redemption yields include both interest and capital gains/losses and so are not relevant for tax calculations. AIUI!

Whether this answers your confusion I don’t know.

cc123mm456

I'll just point out that the price used in that example of 99.60 for T26A is the mid market price. That would not be the price that we could purchase the gilt at. The buy price today (9th September) is 99.67 (I know it's the morning after the original post, so the price will have moved very slightly since yesterday).

That 99.67 is the clean buy price, before adding accrued interest.

https://www.investments.scottishwidows.co.uk/bonds-and-gilts-centre/details/?csid=55184755

Using that price in the MSE calculator (for the quantity of 50) returns these numbers:

I agree that the calculator seems to be inaccurate for this scenario, as you would expect that the 'No tax' rate would be the same as the 'Redemption yield' rate.

I think that it hasn't been designed for very short term maturity dates. It's probably designed for comparing gilts against savings for longer terms. Perhaps 1 year or more.

Personally I would only use this calculator as a very rough guide (and that applies to any other web sites for gilt yields). I would always use my own spreadsheet to calculate the yield. This can then include the specific trading costs on my platform, and my personal tax rate.

PixelPound

For gilts calculations, use

https://www.dividenddata.co.uk/gilt-calculator.py

It has all the gilts there, no need to work out what price to put the gilt at

vnmsr

Thank you all for your responses. Sorry about the delay - been away.

https://forums.moneysavingexpert.com/discussion/comment/82130556#Comment_82130556

I did, got this reply from the MSE's AI assistant - "I can’t confirm the exact formula our gilt calculator uses for the “To match this, you’d need a savings account paying” rates from the info here. What I can share is that our tools are computer-generated ready reckoners that rely on assumptions and rounding, so small differences can appear when you compare them to a manual calculation."

https://forums.moneysavingexpert.com/discussion/comment/82131318#Comment_82131318

This is a very helpful site, thank you.

vnmsr

Personally I would only use this calculator as a very rough guide (and that applies to any other web sites for gilt yields). I would always use my own spreadsheet to calculate the yield. This can then include the specific trading costs on my platform, and my personal tax rate.

Appreciate it, thank you!

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82143058#Comment_82143058

The MSE AI about as much use as any other typical AI then. It's obviously not a rounding error or incorrect assumptions.