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Ask Justin

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Are gilts a good way to reduce my pension fund risk?

Investment | Fixed Interest Helpful? 8

Asked by STANBEHRMAN, submitted 25 May 2013.

Open Quote I want to reduce the risk in my pension fund holdings.

Please could you let me know your views on whether ordinary fixed interest funds (which I think are basically gilts?) or index linked gilt funds are better in today's market.

Is it possible to invest pension money into fixed interest deposit accounts such as are available at banks whereby one can invest in fixed interest bonds @ a specific rate over a given number of years? I have not seen this available in my Legal & General pension.

I look forward to your reply on this.
End Quote

Answered by Justin on 28 June 2013

In the investment world 'fixed interest' refers to IOUs given by investors to governments and companies, i.e. gilts and corporate bonds.

In the savings world it refers to bank and building society savings accounts that pay a fixed rate of interest for a fixed number of years.

The gilt market is arguably quite precarious at present, unless you're looking to buy a gilt at issue and hold until redemption. That's because buying or selling in between means you could pay a higher or lower price for the gilt than its redemption value. Demand for gilts has been high in recent years, in part due to nervous investors buying them as a relative safe house, but also low interest rates and the Bank of England buying bucket loads of gilts as a means of pumping billions into the economy.

All things considered, I'm nervous gilt prices could tumble over the next few years,. especially if the economy does pick up and the need for Bank of England intervention tails off. So while gilts are perceived to be a reasonably safe investment, they're arguably probably less so than usual in the current climate if you're looking to trade rather than buy at issue and hold until redemption. Since gilt funds do the former, the risks mentioned equally apply to them.

Corporate bonds suffer from some of the same issues, although obviously not the Bank of England buying them to pump money into the economy.

If you're concerned about stock markets then I think there's still a good argument for holding gilts and corporate bonds, but bear in mind they may not be as safe as you think (if you accept that current prices are probably on the high side).

You can only normally get access to fixed rate bank accounts via fairly expensive self-invested personal pensions (SIPPs), where unless the pension fund is significant the costs may outweigh the benefits. Most pensions do offer access to a cash fund, but the rates offered are usually paltry.

Sorry I can't give you a more positive answer, but it's a particularly difficult time to de-risk while retaining some prospects for a reasonable return.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (1) - To post a comment please register or login .

Comment by ivanopinion at 12:36pm on 27 Jul 2013:

The scope for losses on non-indexed gilts with long maturities is MASSIVE, whilst interest rates are so low. If interest rates rise, gilt values WILL fall. As interest rates are at their lowest in 300 years, we can guarantee that they WILL rise, sooner or later.

If rates double, values will halve. If rates quadruple, values will fall 75%. Even if rates only return to, say, 3%, which is not particularly high, historically, gilt values will fall in value by 5/6 = 83%. That's a WAY bigger fall than the stock market crash in 2007-2009.

If you are going to buy gilts, get ones that mature within a few years, to limit this effect.