Choosing between conventional & index-linked gilts drawdown

20122013

I am thinking of putting my unwrapped cash into UK gilts or index-linked gilts. My plan requires me to make annual withdrawals to fund my living expenses from January 2030 to January 2038. Additionally, I need to withdraw £20,000 each year during this period to transfer into my ISA.I would like to know:

• Are these two types of UK gilts suitable for my specific needs?
• How should I decide between conventional and index-linked gilts for this strategy?

I am feeling quite nervous of understanding the gilts, which has caused some analysis paralysis and held me back from moving forward. Any guidance or perspective would be greatly appreciated.

As I have to call the platform to trade - is this the only way to get the gilts? as I have 30mins before I start work. and is it correct that only dirty price can be bought?

masonic

Several platforms allow trading online, including SWSD, AJ Bell and HL (though HL only for conventional gilts).

Whether you choose conventional or index linked depends on whether you want to be sure your maturing gilts keep up in a period of high inflation. Conventional gilts will deliver a high enough return for low to medium inflation periods.

If you want the equivalent of £20,000 in today's money in 2038, then you will have more confidence of getting that by buying an index linked gilt in 2026. Over shorter periods, the risk of inflation eroding the value of your conventional gilt is smaller.

I have a ladder covering the part of the 2030s and it is all index linked, but it only covers my essential spending needs. I shall reinvest maturing ILG to roll the ladder forward unless the proceeds are needed (market crash).

The dirty price is the market price, the clean price is an artificial number to simplify comparisons and calculations. When trading online, you need only state how much you want to invest and the dealer will do the rest. You just need to be aware that on some platforms the clean price is shown in the valuation, so the apparent loss is not real. AJ Bell has fixed this problem, others haven't.

InvesterJones

To add to the great answer above, index linkers protect against unexpected higher inflation. If inflation is already predicted to be high then conventional gilts will price this in as well. It's when inflation goes higher than what's priced in, that linkers have their moment. That means that when inflation is already predicted to be high, linkers may not do as well as conventional because they'd require inflation to get unexpectedly higher still to win out.

You can see what the cut off is under 'break even' calculations for linkers - inflation would have to average higher than that, over the course of the gilt, for linkers to beat conventional gilts.

As for the choices - if the ISA limit is nominal (ie doesn't increase with inflation) then conventional gilts cover it just fine. But as living cost do increase with inflation, linkers may be better there.

DRS1

You could have a play with this to compare a ladder of conventional vs index linked gilts (the column on the left hand side allows you to change things like ILG or not and tax rates)

Gilt Ladder Builder · Streamlit

If you are buying the gilts outside a tax wrapper you are going to want low coupon ones and there are more of those with the ILGs.

Nebulous2

Whether you buy index linked or conventional gilts depends on what you expect inflation to do over the timescale you are looking at.

For example TR 33 which is a conventional gilt is currently offering a yield to maturity of 5.077%. T33 which is index-linked is offering a yield of 1.552% above inflation.

If you subtract the second from the first, you get 3.525%

That means the market has priced in inflation of 3.525% over that timescale.

If it is more than that, the linker wins. Less than that and the conventional gilt wins.

You may decide that 5.077 is too good to miss. Or you may decide that you would rather protect against inflation, regardless of what it is, and go for the linker.

My situation is different from yours, I wasn't considering the tax-treatment as I was buying within a Sipp, and I was looking at a longer timescale, but I couldn't decide.

So I went 50/50 and bought some of each.

leosayer

The only thing you need to know is whether you need inflation protection or not. How would a sustained period of high inflation affect you?

As you're planning on buying gilts to fund your living expenses then presumably you need inflation protection to ensure you can always put food on the table, heat the house etc.

20122013

appreciate all the replies, I will write again when I have my number ready.