Gilts advice

Justso65

Hi

I currently have a 6 year gilt ladder running to see me to 67. I like the certainty it gives me.

I have around another £400k sitting in a Royal London pension account and, again for the certainty, I am considering taking all that and investing it in government gilt T32H or TR32 which mature in March or June 2032 to coincide with my 67th birthday. My feeling is I would rather have the certainty of just over a 4% return and my initial investment being safe than ride the stock market in these Trumpian times. My only decision is whether I want a higher annual return with T32H or a higher overall return with TR32. I’m leaning to the higher annual return in case I need some extra income between now and 2032.

I know I would most probably make more on the stock market over that period but having just over £500k at 67 is plenty to cover my needs when added to state and a DB pension at that age.

I would welcome anyone’s thoughts on this.

Thank you, JS.

DRS1

Whichever one you pick you will have a significant coupon. Is an extra 1500 pa going to make that much difference?

If it turns out you don't need that income when it arrives in the pension what are you going to do with it? Reinvest it or keep it in cash just in case you need it next year? I may be wrong but I think some of the return figures assume you reinvest the coupon. I have no idea what difference that makes.

OldScientist

A few thoughts

On a (very) picky note, with gilts the certainty is in cash flows not total returns (since you don't know what price you will reinvest the coupons at - if you intend to spend the coupons, then ignore this comment).

To echo DRS1, what will you do with the cash at 67yo? At that point, you could have up to 30-35 years of life left (on average another 18-21 years) - cash and nominal fixed income is unlikely to provide sufficient income over that period.

Nominal gilts potentially suffer from inflation. I have no idea what will happen over the next 6 years, but a couple of years of high inflation (e.g., around the 10% mark we saw a few years ago) will have a serious impact on the real value of the maturing value. Might an inflation linked gilt ladder commencing from 67yo, which will provide a known real income, be a better choice?

Going all in on gilts reduces the diversification of your portfolio.

leosayer

How do you know that £500k will be "plenty to cover my needs"? Have you done a cashflow plan which models different rates of inflation?

Have you considered buying an annuity? Annuity rates have risen notably recently, in line with gilt yields.

tacpot12

I looked at this from my own perspective a couple of days ago and decided that the 5% natural yield I was getting, and have been getting since I retired (so taking into account the Covid-19 Pandemic, War in Ukraine, Trump, and the War in Iran) was better than the 4% I would get form a gilt. 20% better in fact, and so I'm sticking with my diversified portfolio of Investment Trusts, EFTs and Unit Trusts. I have some other sources on income, but not enough to cover my essential spending, but even in my income drops a little (which is never has) I'm still better off.

QrizB

I am considering taking all that and investing it in government gilt T32H or TR32 which mature in March or June 2032 to coincide with my 67th birthday. My feeling is I would rather have the certainty of just over a 4% return and my initial investment being safe than ride the stock market in these Trumpian times.

I'll just note that GRY on both those gilts is a smidgen over 5% today. The coupon on each is 4.something% but they're priced under par.

• T32H - 4.625% coupon, GRY 5.09%.
• TR32 - 4.25% coupon, GRY 5.04%

Data from https://lategenxer.streamlit.app/Gilt_Ladder so not definitive, E&OE.

Or, if you don't need the coupons for income and want to avoid inflation risk, you could choose the T32 index-linked gilt.

Veloflyer

I have an ILG ladder in a SIPP with Bell as an income bridge initially to take me until 67 when SP (hopefully) kicks in. I too like the (relative) security in these interesting times and the hedge against inflation - which I think may rise in the near future. My ladder will be ring-fenced for day to day expenditure. Theoretically there is enough in the pot ( with SP) to take me @ 25 years beyond SP age at current spend - either via another ladder else an annuity.

Anything else and any extra required for day to day spend/healthcare/holidays/one way trips to Switzerland will come from the semi-luxury pot of investments held in another SIPP.

tigerspill

I have spent the last year since last Christmas diversifying into gilts, derisking and selling some of my index funds that just seem to go up and up and that makes me nervous.

I have 5 years of my expenditure in cash and nominal gilts. Then for years 6 to 15, I have used Indexed Linked Gilts. I then have my remaining equities to cover beyond this 15 years. If equities remain high, I will sell more each year and add another year of ILGs. If equities drop for a while, I can wait for them to hopefully recover and continue my transfer to ILGs.

Justso65

https://forums.moneysavingexpert.com/discussion/comment/82167094#Comment_82167094

Thank you for your reply. I know £500k will be enough because I will have a state pension and a DB pension at 67. In addition my wife has a DB pension and a state pension 3 years later. The combined total of those at my 67th will be circa £48k at today’s values followed by another state pension 3 years later. So the £500k is not by only income source. It will be used as a top up pot should I need it. I know inflation eats into the value of these pensions but I am making a not unreasonable assumption that £48k in todays value will be a good basis for a pension income to be topped up as required by a £500k DC pot. I have no desire to use an annuity.

DRS1

I confess I do not follow what your income is or will be at 67 or later but at some point (maybe when your wife is 67) I assume the combined total will hit £48k. This pension is in your name so when you draw money out of it (as taxable income) that will be added to your other income and you may want to ask yourself if that will push you over the higher rate threshold.

Obviously if all £48k was your income there wouldn't be much room left. If your income was £24k then not a problem but I imagine there isn't a straight 50/50 split and maybe your share of the £48k is higher than your wife's.

Depending on your current income is there any case for taking some money out of the pension now? It is something which some people do - to draw from their DC pension before a DB pension and/or the state pension kicks in. For all I know you are currently in higher rate territory and this is a non starter but you do find that people who do this and have no room for what they draw in an ISA will put the money in low coupon gilts (or ILGs) in their GIA. Just a thought.

phlebas192

I must admit that I am a little bemused at the premise that you need to choose between T32H and TR32. With £400k to invest the additional transaction costs are so small that there's no reason to not put half into each if there is even the slightest question of which would be "best".

What is more significant to me, is what are you intending to do in 2032 when it/they mature? Basically when one or both mature they are going to release a bit over £400k in cash plus the coupons received. If you take the real return of the T32 index linked gilt as a measure of expected inflation, that will be somewhere in the region of £435k in today's terms (ie don't be seduced into thinking in to day's money in the future - the real amount will be a lot less). At that point you could find that equities are higher than they are today and no less 'cheap' and that gilts are yielding rather less. So what would you do then? Buy equities at higher prices than today or buy gilts yielding less? (either might be a 'good' decision at the time but I rather suspect that neither would be considered a good outcome today)

In your situation, I would probably be looking at splitting the amount into multiple index-linked and non-linkers over a range of maturities. Purely as an example of what I have done, I sold a modest chunk of our equity investments recently and put them into a mixture of nominal & index linked gilts with maturities from as little as 3 years to 45. The latter ones are essentially a punt on global financial issues leading to government intervention lowering yields. May happen, may not. But the vast majority of them are simply to provide a predictable income over the next 20 years.

TLDR - assuming your costs are comparatively small then you can reduce the timing & inflation risk by investing in a range of maturities and index linked / nominal gilts.