Operation Brit-Twist: making gilts more attractive to UK retail investors

Elston Consulting, the investment solutions provider supporting UK financial advisers, today announces the publication of its White Paper “Operation Brit-Twist: How the issuance of more Ultra Low Coupon Gilts could attract UK Retail investor demand to help reduce the size and cost of UK Government Debt.  The white paper is available here.

Click read more to read the summary. 

Operation Brit-Twist: making gilts more attractive to UK retail investors

Elston calls on more adviser-facing retail platforms to offer access to near-term low-coupon direct gilts to enable more advisers to use them as a smarter alternative to cash deposits.  After adjusting for tax, near-term low-coupon direct Gilts offer substantially higher yields than cash deposits.  Growing demand from retail investors could help the UK deliver an “Operation Brit-Twist” of the UK’s outstanding government debt using a three-step plan:

1. Shorten it: Shortening the maturity profile of the UK’s overall stock of government debt would help reduce the long-term overall cost of servicing that debt.
2. Shrink it: By issuing shorter-dated debt to buy back below-par longer-dated debt, the overall nominal value of debt outstanding reduces, lowering the debt/GDP ratio
3. Sharpen it: By issuing shorter-dated (<5 year) debt as Ultra Low Coupon Gilts, it sharpens up the yield received by investors owing to the CGT exemption for direct gilts relative to cash deposits.  This makes it extremely attractive for higher and additional rate taxpayers to to buy gilts (lend to the Government).

The White Paper also makes technical recommendations to retail investment platforms and to the DMO on how they could work together to make near-term direct gilts more accessible to UK financial advisers and DIY investors.  These include:

1. Issue near-term (<5 year) Ultra Low Coupon Gilts to maximise tax efficiency and attract retail investors, building on the success of recent tenders.
2. Close the gaps in the maturity ladder and align maturity dates: Over the next six years to 2030, six tax payment deadlines have gilts with aligning maturities gilts, six do not.  Also aligning maturity dates for these retail-friendly near-term Gilts to 24th, not 31st of January and July, creates sufficient time for principal payments to clear to retail platforms and from there to client’s bank accounts for onward payment to HMRC. This represents an operational improvement from UK advisers’ perspective.
3. Providers should help broaden access: only two of 19 investment platforms used by financial advisers provide access to Direct Gilts.  A concerted effort by the other platforms to improve access to Direct Gilts could open the door to the £1 trillion UK advisory platform market.  For DIY investors, clearer labelling, signposted data presentation and enabling comparisons could help guide and inform investors.

Elston estimates there is current demand of £12bn pa for near-term low coupon direct gilts from retail investors based on recent tenders.  There could be an addressable market of up to £55-80bn in annual demand from retail investors if more platforms enabled access and retail awareness was increased.  This way, retail investors could help step in as demand from pension schemes declines.
Henry Cobbe, Founder & Head of Research at Elston Consulting:
“The tax-efficient attraction of high yield/low coupon direct gilts came about by accident following years of low interest rates, but too few platforms provide access to this opportunity.  We are calling for platform providers to step up as regards access to education around direct gilts and also for the DMO to consider embedding these attractions deliberately.  Together, this could help create a new source of demand for UK Gilts that could fund an “Operation Brit-Twist.”  This win-win-win opportunity is worth exploring for the platform providers, HM Treasury, and retail investors alike.