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A Guide to Lump Sum investments

 

Gilt-edged securities

Gilts represent borrowing by the Government and, therefore, have the highest degree of security. An investor in Gilts will be guaranteed a fixed yield (or coupon) for the life of the stock. This is normally paid twice a year. Gilts can be purchased from the Bank of England or a stockbroker.

Gilts are traded daily and the market price fluctuates in response to market sentiment and current prevailing interest rates. The price quoted shows the cost of purchasing stock that will be redeemed on the redemption date at £100 (the par value). The market price is usually less than the £100 par value, but if the interest rate is very attractive compared to current prevailing interest rates it may be more than £100. Most gilt-edged securities have a redemption date (or dates) at which time the Government guarantees to repay the investor the full par value of the stock held. The investor will make a capital gain if the market price paid for the stock was below par value. If the market price was greater than par value then there will be a capital loss. There is no tax to pay on any capital gains made on Gilts.

Some Gilts are index-linked which means that the redemption values and the annual interest are increased in line with the Retail Prices Index. This protects the investor against inflation.

All new issues of gilts offered are paid gross, although an election can be made to have this payment made net. Gilts issued prior to 20 July 1998 may be paid net of 20% tax.

All investors can make an election to have this payment converted to a gross equivalent. For investors receiving net or gross interest they will find themselves in the following situations:

  • Additional rate taxpayers have a further 30% liability (50% if received gross).
  • Higher rate taxpayers have a further 20% liability (40% if received gross).
  • Basic rate taxpayers have no further liability (20% if received gross).
  • Non taxpayers can reclaim the tax paid at source (nil if received gross).

Pros and Cons of Gilts:-

Pros.

  • Government backed security.

  • Fixed rate of return.

  • Capital returned if held to redemption date.

  • Gilts can be held in ISAs and Pensions.

  • No CGT paid on sale.

Cons.

  • Generally will not be a hedge against inflation, unless index linked gilts are purchased.

  • May get more or less than your original capital back if sold before redemption date.

  • Yields can be complicated to calculate.

  • The coupon offered on an index-linked Gilt will be lower than on a conventional Gilt.

NEXT STEPS

To learn about other investment options, return to the Introduction to investments section.

To learn about the following investments, if you aren't already familiar with them click on the relevant link:

However if you feel that you need some help from a financial advisor, then visit our section on obtaining financial advice, or our page on Laterlife selected services and associated advice.

 

   
 
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