IL Gilts vs NS&I Certificates

[GeoffF100]

Index linked gilts are now paying substantially more than the so recently coveted index linked National Savings Certificates. Some of my Certificates about to mature. Should I ditch them in favour of the gilts?

It would really spoil the party for the gilts if they lost their CGT free status. That would probably be more politically difficult with the Certificates, which are held by ordinary people rather than "just the rich". It may also be more difficult for the government to default on the Certificates. I can cash in the Certificates at the beginning of the investment year for a negligible penalty, whereas selling the gilts before maturity may incur a significant real terms loss. In the future, I may be able to roll over the Certificates on more favourable terms than the gilts.

Is there a credible case for holding a few percent of my money in the Certificates?

[Aminatidi]

I hold some NS&I certs and every time I ask about whether to keep them I'm told, broadly speaking, to hold onto them for dear life.

Isn't the key difference that with certs your initial capital is always there?

[GeoffF100]

I hold some NS&I certs and every time I ask about whether to keep them I'm told, broadly speaking, to hold onto them for dear life.

That was true when IL gilts had a real redemption yield of -3%. It is now positive.

Isn't the key difference that with certs your initial capital is always there?

That is true at maturity for the IL gilts too, and the gilts are currently earning a few percent more per annum, because for the same maturity they are linked to RPI rather than CPI, and because they are a little below par. As I have said, you can get out of the certificates before maturity at the beginning of an investment year preserving the value in CPI real terms, but you may face a real terms loss from the IL gilts.

[Spet0789]

I hold some NS&I certs and every time I ask about whether to keep them I'm told, broadly speaking, to hold onto them for dear life.

That was true when IL gilts had a real redemption yield of -3%. It is now positive.

Isn't the key difference that with certs your initial capital is always there?

That is true at maturity for the IL gilts too, and the gilts are currently earning a few percent more per annum, because for the same maturity they are linked to RPI rather than CPI, and because they are a little below par. As I have said, you can get out of the certificates before maturity at the beginning of an investment year preserving the value in CPI real terms, but you may face a real terms loss from the IL gilts.

Out of interest, which IL gilts are you looking at?

As a general statement, shorter dated IL gilts are a bit of an orphan investment in that there are no natural institutional buyers for them. So for individual investors they can be attractively priced.

IIRC, the annual accretion on IL gilts is not floored at zero. You could buy an IL gilt today, if we then see deflation (unlikely though that may be) you would get back less than you invested even if you hold to maturity. So your statement above is not strictly correct. You don’t have that risk with I-L certs.

[yorkshirelad1]

If you cash out your NS&I certificates, bear in mind that you cannot purchase again later. New certificates are only available for maturing (automatically rolled over) certificates. So if you change your mind, and want back into NS&I certificates having cashed out, you can't. That, for me, is enough of a compelling reason to hold onto NS&I savings certificates.
Also bear in mind absolutely no income tax or CGT on NS&I savings certificates. Gilts (depending on where they're held) may be subject to income tax.

[Spet0789]

If you cash out your NS&I certificates, bear in mind that you cannot purchase again later. New certificates are only available for maturing (automatically rolled over) certificates. So if you change your mind, and want back into NS&I certificates having cashed out, you can't. That, for me, is enough of a compelling reason to hold onto NS&I savings certificates.
Also bear in mind absolutely no income tax or CGT on NS&I savings certificates. Gilts (depending on where they're held) may be subject to income tax.

True but there are plenty of bonds around with negligible coupons, which is the only taxable bit.

I bought some Jan 2025 gilts on a yield of nearly 5%. Paying additional rate tax on the 0.25% coupon, I will lose about 0.13% of that yield to income tax.

For index linked bonds coupons are even lower.

[yorkshirelad1]

Small point of info: NS&I switched from using RPI to CPI for indexing ILSC in May 2019, so if you have 5-year ILSC with a start date before May 2019, they may be indexed to RPI, for one more year (not to be sniffed at)

e.g. https://www.nsandi.com/help/manage-your-savings/maturing-investments/index-linked-savings-certificates

From 1 May 2019 if you decide to renew an existing Certificate, we will calculate the index-linking using the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI).

[Dod101]

I have Index Linked N S & I certs, and will be most unlikely to sell them and I certainly would not switch to Gilts for a probably relatively short term and
modest gain, but I may be wrong. I hate jumping around for gains and just let me tick on.

Dod

[hiriskpaul]

The difference is with the investment and reinvestment risk.

If you need access to your money before maturity, certificates offer lower risk of loss. To mitigate that risk you can go for shorter gilts, but then you have reinvestment risk. When the gilts mature you may not be able to reinvest on a positive yield.

There is a risk of course that NS&I may stop offering new certificates.

Perhaps diversify and hold some of each?

[GeoffF100]

Out of interest, which IL gilts are you looking at?

I already have a big holding of 0.125% 2029, which is just a little longer dated than a 5 year certificate. It is RPI linked and the clean price us a little below par, whereas the replacement certificate would be CPI linked. Actually, I would probably buy some 0.125% 2036, but 0.125% 2031 is also a possibility. There is no guarantee that I would be able to rollover certificates in the future, of course.

IIRC, the annual accretion on IL gilts is not floored at zero. You could buy an IL gilt today, if we then see deflation (unlikely though that may be) you would get back less than you invested even if you hold to maturity. So your statement above is not strictly correct. You don’t have that risk with I-L certs.

It is true that the certificates have a potential advantage there. Nonetheless, the gilt redemption value cannot fall in real terms.

I currently have an excessive amount of cash. I feel inclined to add some of that to the maturity value of the certificate and buy some 0.125% 2036, leaving my other certificates untouched this year. I will most likely reinvest the proceeds of a couple of term accounts in the same stock later this year, if the price is still attractive. If I do not invest when the price is good, I could miss out. I would still have a couple of IL certificates, which are yet to mature.

[dealtn]

Nonetheless, the gilt redemption value cannot fall in real terms.

No. But if you buy them above par the value of your capital will fall in real terms (just as it would rise were you to buy below par).

[GeoffF100]

No. But if you buy them above par the value of your capital will fall in real terms (just as it would rise were you to buy below par).

The clean price of Treasury 0.125% Index Linked 2036 was about 90 when I last looked.

[dealtn]

No. But if you buy them above par the value of your capital will fall in real terms (just as it would rise were you to buy below par).

The clean price of Treasury 0.125% Index Linked 2036 was about 90 when I last looked.

Indeed, but on a thread that may be revisited many times, and refers to securities that will have a long trading history, it is important to caveat statements that use a phrase such as "can not". Not every observer will understand the subtleties that investing in government issued index linked securities don't provide absolute real preservation of capital (amply demonstrated over the last decade) even when held to maturity.

"Currently do not" and "Can not" are distinctly different.

[GeoffF100]

The difference is with the investment and reinvestment risk.

If you need access to your money before maturity, certificates offer lower risk of loss. To mitigate that risk you can go for shorter gilts, but then you have reinvestment risk. When the gilts mature you may not be able to reinvest on a positive yield.

There is a risk of course that NS&I may stop offering new certificates.

Perhaps diversify and hold some of each?

I have a ladder of term accounts maturing over the next four years. The risk is that I will not be able to stash money away somewhere where it preserves its real value after tax. The ONS thinks that I will pop my clogs in 2036, but I have excellent health, and I will most likely live beyond that. I certainly have reinvestment risk with the 2029 (about 20% of my unsheltered cash/bonds), which I first bought a long time ago. I do not want to add to it for that reason. I have also got reinvestment risk with the certificates, but the capital value is smaller (about 10%). I will probably be able to roll those over, but it is reasonable to run them down. (Currently overall 62.5% equities.) My biggest risk on the expenditure side would be paying for full time nursing care, but I should be able to do that out of income.

[Spet0789]

The clean price of Treasury 0.125% Index Linked 2036 was about 90 when I last looked.

Indeed, but on a thread that may be revisited many times, and refers to securities that will have a long trading history, it is important to caveat statements that use a phrase such as "can not". Not every observer will understand the subtleties that investing in government issued index linked securities don't provide absolute real preservation of capital (amply demonstrated over the last decade) even when held to maturity.

"Currently do not" and "Can not" are distinctly different.

Let us be precise here.

1) you buy a newly issued 5 year IL gilt today planning to hold to maturity.

2) you buy an old IL gilt maturing in 5 years time, where the index ratio is 1.5 (ie prices have risen by 50% since it was issued) planning to hold to maturity.

if we see rampant deflation over the next 5 years then instrument 2) can lose 33% of its nominal value.

That’s before we get into the difference between year-on-year inflation (NS and I certs) and bond-style inflation.

[GeoffF100]

Let us be precise here.

1) you buy a newly issued 5 year IL gilt today planning to hold to maturity.

2) you buy an old IL gilt maturing in 5 years time, where the index ratio is 1.5 (ie prices have risen by 50% since it was issued) planning to hold to maturity.

if we see rampant deflation over the next 5 years then instrument 2) can lose 33% of its nominal value.

That’s before we get into the difference between year-on-year inflation (NS and I certs) and bond-style inflation.

We can say that it does not matter if the gilt has lost 33% of its nominal value if prices of goods and services are also 33% lower. (Most of my money will go to a charity which spends it on goods and services.) We had heavy deflation in the 1930s, but the world has changed. It is much easier now for governments to deface the currency than it is for them to raise taxes and cut expenditure. I do not have any way of protecting a reinvestment of say £1 million against deflation and inflation after tax. The IL certificate question is more of a tactical matter than a strategic one for me.

[dealtn]

Indeed, but on a thread that may be revisited many times, and refers to securities that will have a long trading history, it is important to caveat statements that use a phrase such as "can not". Not every observer will understand the subtleties that investing in government issued index linked securities don't provide absolute real preservation of capital (amply demonstrated over the last decade) even when held to maturity.

"Currently do not" and "Can not" are distinctly different.

Let us be precise here.

1) you buy a newly issued 5 year IL gilt today planning to hold to maturity.

2) you buy an old IL gilt maturing in 5 years time, where the index ratio is 1.5 (ie prices have risen by 50% since it was issued) planning to hold to maturity.

if we see rampant deflation over the next 5 years then instrument 2) can lose 33% of its nominal value.

That’s before we get into the difference between year-on-year inflation (NS and I certs) and bond-style inflation.

If you are being precise can you explain how 1) doesn't also lose the same value?

It will be issued at 100 mulitplied by current RPI and redeem at 100 times the future deflated RPI. If that is 2/3 rd of the current index because of that rampant deflation then it too will lose 33% of its value.

Are you mistaking what nominal means with respect to both old style and new style linkers?

[Spet0789]

Let us be precise here.

1) you buy a newly issued 5 year IL gilt today planning to hold to maturity.

2) you buy an old IL gilt maturing in 5 years time, where the index ratio is 1.5 (ie prices have risen by 50% since it was issued) planning to hold to maturity.

if we see rampant deflation over the next 5 years then instrument 2) can lose 33% of its nominal value.

That’s before we get into the difference between year-on-year inflation (NS and I certs) and bond-style inflation.

If you are being precise can you explain how 1) doesn't also lose the same value?

It will be issued at 100 mulitplied by current RPI and redeem at 100 times the future deflated RPI. If that is 2/3 rd of the current index because of that rampant deflation then it too will lose 33% of its value.

Are you mistaking what nominal means with respect to both old style and new style linkers?

In fact, you are correct. Gilt linkers are unusual compared with similar bonds issued by other countries) in that they don’t have a deflation floor. ILSCs do.

[GeoffF100]

I decided to hang onto my certificate that is maturing this month. The rules for cashing in early are changing for certificates renewed from 23 July onwards. It will no longer be possible to cash them in early:

https://www.nsandi.com/help/manage-your ... rtificates

As far as I can see, that applies even on death. That is not good at all.

[CliffEdge]

I decided to hang onto my certificate that is maturing this month. The rules for cashing in early are changing for certificates renewed from 23 July onwards. It will no longer be possible to cash them in early:

https://www.nsandi.com/help/manage-your ... rtificates

As far as I can see, that applies even on death. That is not good at all.

That is just a cunning way of slowly forcing people to cash them in. Very very bad news. for me, and no doubt all certificate holders. At least they can still be rolled over.
I actually hate the patronising style of their "explanations" for the changes they make. Swine, all of them.