Concerns about inflation and the desire for safety have driven the price of index-linked gilts up to a point where the yields after inflation are negative. This has provided great capital returns over the last couple of years, but the prospects going forward do not look good. Even the longest dated stock, the 1.25% Index-Linked Treasury 2055, only provides a real yield of 0.25%.
If real yields increase to more normal levels of around 2%, the price of these gilts could fall substantially. Not that real yields are likely to increase any time soon, but this is something to watch.
The low yields from index-linked gilts have an effect also on annuities, so that the best index-linked annuity rate for a 65 year old male is only around 3.81% versus 6.13% for a level annuity. This makes it very unattractive to buy index-linked annuities, and makes income drawdown look more attractive despite the investment risks.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
