UK based investing - bond ETFs

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rgb73
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UK based investing - bond ETFs

Post by rgb73 » Thu Sep 14, 2017 8:55 am

Hello all,

Can any UK based investors let me know of a good, all in one UK bond ETF with (of course) low expense ratios? I'm kind of after the same as the BND fund in the US. If you can't think of one, a combination of 2 or 3 UK bond ETFs would also suffice. Thus far I haven't found anything so wondering what other UK investors in this space might be doing.

Thanks

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Re: UK based investing - bond ETFs

Post by Valuethinker » Thu Sep 14, 2017 9:26 am

rgb73 wrote:
Thu Sep 14, 2017 8:55 am
Hello all,

Can any UK based investors let me know of a good, all in one UK bond ETF with (of course) low expense ratios? I'm kind of after the same as the BND fund in the US. If you can't think of one, a combination of 2 or 3 UK bond ETFs would also suffice. Thus far I haven't found anything so wondering what other UK investors in this space might be doing.

Thanks
There's not a lot of merit in diversifying across credit risk. You can hold an Investment Grade bond fund, and accept credit risk, and that probably does not hurt you too much unless we rerun the Financial Crisis. Or you can just hold UK government bonds (gilts). The main problem with gilt index funds is that the duration of the gilt market is the longest of any government bond market of which I know-- about 13 years. So you are taking maximum interest rate risk if interest rates rise faster than the market thinks.

There's really no equivalent of US Mortgage Backed Securities (Agency) bonds like GNMAs etc.

https://www.vanguard.co.uk/uk/portal/in ... l-products gives you all the Vanguard ones.

The UK short term Investment Grade Bond Fund, or the Investment Grade bond fund, will do it.

In truth just about any will do. You basically probably want hedged into GBP (but that will have hurt this past year) and you may prefer Accumulating to Distributing (depending on where you hold these).

https://www.ishares.com/uk/institutiona ... &fac=43515

Fixed income product list. I have been using IGLS (gilts up to 5 years) but the yield is probably just about the expense ratio, so you do have to accept that- -this is a zero return product, currently.

It's fairly painful to hold fixed income outside of Pensions & ISAs. However the good news is yields are so low, that that's not a big issue right now ;-).

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rgb73
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Re: UK based investing - bond ETFs

Post by rgb73 » Fri Sep 15, 2017 4:21 am

Thanks ValueThinker. Sometimes with bonds I feel I'm better off overpaying my mortgage (rate = 2.35%), and simply holding a sizeable amount in cash.

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Re: UK based investing - bond ETFs

Post by magneto » Fri Sep 15, 2017 5:40 am

rgb73 wrote: ↑
Fri Sep 15, 2017 9:21 am
Thanks ValueThinker. Sometimes with bonds I feel I'm better off overpaying my mortgage (rate = 2.35%), and simply holding a sizeable amount in cash.

Depends on the extent of need for dry powder foreseen.
Difficult to liquidate part of property/mortgage to buy Stocks.

As above VGOV and IGLT are the obvious candidates for Gov't Debt (Gilts) a one stop shop.
iShares offer the more comprehensive selection of the various debts.
We currently favour short term, esp IS15, but is far from a specific recommendation.

The expected -ve real yields on bonds has driven investors into curious Fixed Income Alternatives which come any Stock crunch may or may not hold up well.
Last edited by magneto on Fri Sep 15, 2017 7:55 am, edited 7 times in total.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: UK based investing - bond ETFs

Post by magneto » Fri Sep 15, 2017 6:03 am

It is worth noting that if the present UK CPI inflation rate of 2.9% is to be believed, then in real terms (after inflation) the cost of the mortgage is 2.35% - 2.90% = minus 0.55%.
With the repayments being in future inflation eroded £Sterling, then the lender is suffering a loss in real terms, in effect paying the borrower to take out the loan..

However all this would change should inflation settle back as some anticipate.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: UK based investing - bond ETFs

Post by Valuethinker » Fri Sep 15, 2017 11:15 am

magneto wrote:
Fri Sep 15, 2017 6:03 am
It is worth noting that if the present UK CPI inflation rate of 2.9% is to be believed, then in real terms (after inflation) the cost of the mortgage is 2.35% - 2.90% = minus 0.55%.
With the repayments being in future inflation eroded £Sterling, then the lender is suffering a loss in real terms, in effect paying the borrower to take out the loan..

However all this would change should inflation settle back as some anticipate.
That's true but then there is the question of the alternative use of the money. That is "paying" minus 1.9% right now (yield on 10 year gilt about 1%).

So you are still better off repaying mortgage against investing in a similar risk free instrument.

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Re: UK based investing - bond ETFs

Post by Valuethinker » Fri Sep 15, 2017 11:18 am

rgb73 wrote:
Fri Sep 15, 2017 4:21 am
Thanks ValueThinker. Sometimes with bonds I feel I'm better off overpaying my mortgage (rate = 2.35%), and simply holding a sizeable amount in cash.
As per other posters it is about risk:

- repaying debt is a risk free, after tax, return. 2.55%. There's nothing you can invest in, risk free, that will give you that. Gilts give you 1%. This assumes there are no repayment penalties on your mortgage

- however you sacrifice liquidity. A mortgage is about the only long term finance you'll ever get. So much depends on when you want to have paid your mortgage off, by?

If interest rates rise, and the Bank of England Monetary Policy Committee meeting appears to indicate they will, perhaps by December, then your mortgage rate goes up. Thus making repayment of mortgage even more attractive. You might want to wait until it happens.

EDIT - add to that

Because allowances for pensions and ISAs "expire" at the end of the tax year (pensions more complex but let's assume that) before you repay mortgage you want to:

- have used your maximum ISA allowance even if some of it is invested in very low return bonds. Ditto for your spouse's ISA (I have not looked at Lifetime ISAs for children, because it is not relevant, but you should consider them, too)

- made sure you get your employer match on pension. That is a 100% return on your gross contribution.

If you are in the 40% tax bracket, then pensions look pretty good for additional contributions with a couple of points:

- if it is a "salary surrender" scheme then you also get employer NI (13.8% roughly) on top. Thus net of tax you contribute 60p, and you get 100p +13.8p of contribution. Nice

- you need to take a view on the £1m lifetime limit - if you project out your pension at say 7% to your projected retirement date, do you go over £1m**? Because then you will pay 55% tax when you withdraw any excess. That was a nasty little tax rise Mr. Osborne sneaked in, and because no one understands pensions, the usual suspects didn't howl and force withdrawal. £1m will buy you an annuitized pension of about £22k (inflation indexed) when you are 65-- not riches (do I sound bitter and twisted, then? ;-) )

If there's any danger you are going to hit the £1m limit in say the next 10 years, you should probably take professional advice. You *must* take professional advice if considering trading out of a Final Salary/ DB scheme benefit into a lump sum offered by the employer-- the FCA is investigating these transfers for malpractice. My usual view (it's a tiny amount of money for me) is "no, unless shown otherwise why yes". Duplicating an FS scheme benefit at age 60 or 65 would be absurdly expensive. Exceptions are if you have a measurably impaired life expectancy (but remember: your spouse still gets 50% of your pension- -that's law).

Of course if the government changes all bets are off. Since tax rises on pensions are "stealth" (the same reason companies cut pension contributions, because employees don't get it) expect more of them to come even from this government (if not in this Parliament). I thought they would kill the 40% tax credit on pension contributions but instead Mr. Osborne was sneakier and cut the lifetime allowance.

If you are in the 45% tax bracket you need professional advice, not spoutings of some anonymous bloke on the internets ;-). Ditto if you are in that 61% marginal tax rate bracket with the clawback (it's something like between £105 and £120k pa).

So ISAs to the max then pensions *except* to get the employer match (if any).

Then transfers to children via Lifetime ISAs or (can't remember the term) the other savings schemes allowed for children.

Note if your children have university student loans and you think they will pay them off (make enough money in their careers to pay them off) then right now the rates are 6% (on new loans only?) and that's a pretty attractive "investment".

Then you can think about paying down mortgage. But to be honest, unless you are within say 10 years of retirement, ISA is better, generally. (I am quite risk averse so I did not follow my own advice on that).

** an alternative which to some extent I have pursued is to move your pensions into fixed income (bonds) and keep your equity exposure in your ISAs. Given gilt yields of 1.0% for the 10 year bond (Yield to Maturity/ Gross Redemption Yield is best estimate of expected return) that's one way of avoiding skating over the £1m limit -- remember 10 years at 7% doubles, so if you have £500k at 45 (earliest age you can take a pension is 55) then you will hit it, potentially.

Again if there is a danger you will skate over £1m you need professional advice as to your options.

Ditto if you are concerned about Inheritance Tax. I have advised an elderly relation against investing to avoid IHT (even though it might benefit me) because my experience of such schemes has not been a profitable one (in entirely different contexts).

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Re: UK based investing - bond ETFs

Post by rgb73 » Mon Sep 18, 2017 3:40 am

Thanks, this is all really good food for thought. As it happens, I push a lot into my defined contribution pension scheme as it is salary sacrifice (about 25% of my salary, but with employer contributions and NI rebates its getting towards 36%), which pushes me out of the higher rate tax band. I do the childcare voucher thing too, and overall I think my effective tax rate on a higher rate salary is about 13%. I contribute a bit to ISAs, but so far its generally been stocks. I keep a good load of cash around, about 8 months of living expenses.

The thing with the pension is I can't get my mitts on it for at least another 11 years. Thats probably a good thing, but frustrating nonetheless, hence I contribute a bit into my ISA every year.

I'm well below the £1m limit, currently about £50k as I was overseas for a long time - but I've got my eye on it ;)

One thing where it is better with pensions is the ability to push myself out of the higher tax bracket. I do that first and then look at ISAs.

Thanks again - at least it sounds like I'm roughly doing the right things.
rgb

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Re: UK based investing - bond ETFs

Post by Valuethinker » Mon Sep 18, 2017 3:57 am

rgb73 wrote:
Mon Sep 18, 2017 3:40 am
Thanks, this is all really good food for thought. As it happens, I push a lot into my defined contribution pension scheme as it is salary sacrifice (about 25% of my salary, but with employer contributions and NI rebates its getting towards 36%), which pushes me out of the higher rate tax band. I do the childcare voucher thing too, and overall I think my effective tax rate on a higher rate salary is about 15%. I contribute a bit to ISAs, but so far its generally been stocks. I keep a good load of cash around, about 8 months of living expenses.
ISAs v. stocks? Do you mean that you invest in stocks before your use your ISA allowance? That's not a good idea.

Or just that your ISAs are equity ISAs? You need to keep your fixed income either in your pension or your ISA.
The thing with the pension is I can't get my mitts on it for at least another 11 years. Thats probably a good thing, but frustrating nonetheless, hence I contribute a bit into my ISA every year.
I wish I could say I had 11 years to go ;-). For me, 11 years not touching it is an *excellent* idea. I could be retired for 3 decades (at least my spouse probably will be).
I'm well below the £1m limit, currently about £100k, but I've got my eye on it ;)
At 7% doubles every 10 years. If you hit 250k by the time you are 40, then you will breach the limit before retirement. Of course, the rules will have totally changed (again) by then ;-).
One thing where it is better with pensions is the ability to push myself out of the higher tax bracket. I do that first and then look at ISAs.

Thanks again - at least it sounds like I'm roughly doing the right things.
rgb
I put too much money into pensions. ISAs, with the much higher allowances, are the preferred route.

A future government will have to look at capital taxation. Whether that will come in the form of higher property taxes (the best route, since property taxes are easy to collect, but also politically the most explosive) or higher taxes on financial wealth (more likely) it will come. The UK is an aging population, will do so faster post Brexit, and there is a demand for a Continental level of public services on a North American budget and taxes.

Push will come to shove. Capital is the big untaxed frontier. The current generation of 60 somethings will be the last to retire early (or retire to Spain, for that matter!).

The tax raid has already started on pensions-- the cost of the 40%/ 45% tax credit is too much-- the £1m limit was a stealthy way of attacking that, because most people don't understand the implications (I did not, until I read about it in the FT)*. Whether it will spread to *past* contributions to ISAs depends very much on the ideological stripe of the next government (and the next government + 1).

* the genius was that those over the £1m limit already were grandfathered out-- have a couple of colleagues who retired at 60 that way. It's a tax rise on *future* retirees (just as the student loan is a tax on future workers). Clever people, Mr. Osborne and Her Majesty's Treasury.

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Re: UK based investing - bond ETFs

Post by rgb73 » Mon Sep 18, 2017 4:05 am

No, sorry, I wasn't clear. My purchases in my ISA are generally stocks - no bonds yet, hence the initial question in the thread.

Just as a question why do you regret putting so much into pensions? Was it because of the annuity thing? Nowadays with defined contribution you can choose how you want it invested as you withdraw after the Osborne pension shakeup.

I tend to agree with you in that a tax on capital is slowly coming - tax on an income that isn't particularly high and not rising makes it feel inevitable that the govt will have to find other sources. Tax on property is easy but politically difficult but as there are fewer and fewer property owners their votes as a proportion get smaller. I guess we'll see.

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Re: UK based investing - bond ETFs

Post by Valuethinker » Mon Sep 18, 2017 5:00 am

rgb73 wrote:
Mon Sep 18, 2017 4:05 am
No, sorry, I wasn't clear. My purchases in my ISA are generally stocks - no bonds yet, hence the initial question in the thread.
OK. Well you know the situation- the higher return right now (risk free) is to pay down your mortgage. However if you are not fully utilizing your pension and ISA allowances, it's better to stick it in those.
Just as a question why do you regret putting so much into pensions? Was it because of the annuity thing? Nowadays with defined contribution you can choose how you want it invested as you withdraw after the Osborne pension shakeup.
Basically the £1m is very easy to hit-- it really depends on your age. It is quite likely I will hit it in the next 15 years i.e. before planned retirement date. But I did not have enough (ie over £1.0m) to opt for protection now. And I did not use my full ISA allowances for a number of years-- a bad mistake, in retrospect.

The 25% tax free lump sum + buy an annuity with the rest never bothered me-- seemed eminently sensible. However £22k pa is hardly a generous pension (less if I take a lump sum).

I should add that the tax free lump sum will not be there when I hit retirement age. For sure, not. It's the easiest thing in the world for a Chancellor to change. He/ she just has to abolish it to the predictable howls, and it will be soon forgotten.

Note I am assuming the current party in power stays in power. If it is the opposition, then all bets are truly off. We shouldn't go there on this Forum (and it's prohibited) but merely to note that that is the case.
I tend to agree with you in that a tax on capital is slowly coming - tax on an income that isn't particularly high and not rising makes it feel inevitable that the govt will have to find other sources. Tax on property is easy but politically difficult but as there are fewer and fewer property owners their votes as a proportion get smaller. I guess we'll see.
I am not sure re "fewer and fewer property owners"? There are more houses built in the UK each year, and they are bought. Yes there is buy-to-let, and home ownership has fallen from its peaks. New households has grown faster than homes built. But it is still more than 50% of UK households last time I checked.

Did you simply mean in a generational sense? But, at some point, their parents and grandparents die, and someone moves into those houses.

There are big concentrations of property wealth in this country, dating back to the Industrial Revolution & before. Thinking Grosvenor Estate (Duke of Westminster) which owns freeholds under most of Mayfair & St James's. Or the Raymond estate, which owns much of Soho. Let alone the big agricultural estates.

The thing about property as a capital tax is you can't avoid it. It's very easy to collect because the property exists in the Land Registry, therefore it can be taxed, if tax is not paid (by whatever offshore shell company that owns it) then a debt charge can be registered against it. It's a lot harder to tax financial assets in an era when you can hide them in multiple offshore companies etc-- obscure the final beneficial owner.

And non-domiciles also pay property tax if they own property in the UK.

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Re: UK based investing - bond ETFs

Post by rgb73 » Mon Sep 18, 2017 5:58 am

OK I understand your point about pensions - I have made quite a lot of use of my ISA allowance rather than pension over the years, so I am kind of on the other side of the coin from you - I have much more in my ISA than in my pension. I feel I can contribute quite a bit to my pension for a few more years anyway, even with the 25% tax free lump sum disappearing (boo hiss).

RE: fewer and fewer property owners - I need to be careful what I say, as I might be heading into a political discussion, but in a long term sense I think wealth will become more concentrated, with less people owning homes (as its tough to afford them, particularly in London) and more renting. Didn't the Duke of Westminister sell of some of his Mayfair estate and buy up big chunks of land around Canada Water? Thats how I see property ownership becoming more concentrated - rich getting richer etc.

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Re: UK based investing - bond ETFs

Post by Valuethinker » Mon Sep 18, 2017 6:19 am

rgb73 wrote:
Mon Sep 18, 2017 5:58 am
OK I understand your point about pensions - I have made quite a lot of use of my ISA allowance rather than pension over the years, so I am kind of on the other side of the coin from you - I have much more in my ISA than in my pension. I feel I can contribute quite a bit to my pension for a few more years anyway, even with the 25% tax free lump sum disappearing (boo hiss).

RE: fewer and fewer property owners - I need to be careful what I say, as I might be heading into a political discussion, but in a long term sense I think wealth will become more concentrated, with less people owning homes (as its tough to afford them, particularly in London) and more renting. Didn't the Duke of Westminister sell of some of his Mayfair estate and buy up big chunks of land around Canada Water? Thats how I see property ownership becoming more concentrated - rich getting richer etc.
There's a new Duke, aged 26 I think. But I assume this is professional management at Grosvenor Estate.

I understand where you are coming from, and yes, let's leave the conversation at that! ;-).

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Re: UK based investing - bond ETFs

Post by TedSwippet » Mon Sep 18, 2017 10:03 am

Valuethinker wrote:
Mon Sep 18, 2017 5:00 am
Basically the £1m is very easy to hit-- it really depends on your age. It is quite likely I will hit it in the next 15 years i.e. before planned retirement date. But I did not have enough (ie over £1.0m) to opt for protection now.
For completeness, note that there are two forms of protection from the April 2016 lifetime allowance reduction, and only one of them, Individual Protection, requires that you had a balance over £1mm in April 2016.

The other is Fixed Protection and is available to anyone regardless of pension savings balance but with the (huge!) proviso that no more pension contributions are (or can be) made after April 2016. Perhaps you can no longer qualify for that one, but if you can then it may be worth considering.

Mr Osborne may be sneaky, but he didn't get this past me. I had planned to work four more years, to age 60, then retire. But the lifetime allowance reduction would have meant either an overt £63k loss from 25% excess LTA tax on the £250k reduction, or a less overt but approximately equal loss from taking Fixed Protection and then having to forgo all employer pension contributions for the four years to retirement.

Since the best way out of a lose-lose situation is to simply stop playing the game, I took Fixed Protection and retired in March 2016, a direct response to this upcoming large tax rise. No regrets at all. Obviously how this plays out depends on individual circumstances, but in my case the effect was large enough to prompt an early career end. Not much of a win for the UK treasury there, then.

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Re: UK based investing - bond ETFs

Post by Valuethinker » Mon Sep 18, 2017 11:35 am

TedSwippet wrote:
Mon Sep 18, 2017 10:03 am
Valuethinker wrote:
Mon Sep 18, 2017 5:00 am
Basically the £1m is very easy to hit-- it really depends on your age. It is quite likely I will hit it in the next 15 years i.e. before planned retirement date. But I did not have enough (ie over £1.0m) to opt for protection now.
For completeness, note that there are two forms of protection from the April 2016 lifetime allowance reduction, and only one of them, Individual Protection, requires that you had a balance over £1mm in April 2016.

The other is Fixed Protection and is available to anyone regardless of pension savings balance but with the (huge!) proviso that no more pension contributions are (or can be) made after April 2016. Perhaps you can no longer qualify for that one, but if you can then it may be worth considering.

Mr Osborne may be sneaky, but he didn't get this past me. I had planned to work four more years, to age 60, then retire. But the lifetime allowance reduction would have meant either an overt £63k loss from 25% excess LTA tax on the £250k reduction, or a less overt but approximately equal loss from taking Fixed Protection and then having to forgo all employer pension contributions for the four years to retirement.

Since the best way out of a lose-lose situation is to simply stop playing the game, I took Fixed Protection and retired in March 2016, a direct response to this upcoming large tax rise. No regrets at all. Obviously how this plays out depends on individual circumstances, but in my case the effect was large enough to prompt an early career end. Not much of a win for the UK treasury there, then.
Thank you.

I may, then, have missed a trick, although retirement was not in prospect. But missed that April 2016 point.

Net net it probably is still worth it to me to get my employer match on my pension contributions (100% return).

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