Update: Since this article was written, Freetrade has enabled Treasury Bills to also be bought in its ISA and SIPP. These tax shelters enable a tax-free return, and buying and holding in Treasury Bills within them negates the major drawback discussed in our piece below. We’ll hopefully get a chance to update this article in the future!

Investment broker Freetrade* has launched an intriguing new place to stash your cash: UK treasury bills.

Forget boring old bank accounts and say “meh!” to money market funds.

After the bond fails of 2022, maybe UK treasury bills can offer a safe refuge for your dough while offering a tasty yield?

How does Freetrade’s UK treasury bill service work?

Freetrade is offering investors the facility to purchase 28-day maturity Treasury bills. 

Treasury bills are short-term government debt obligations issued by the UK’s Debt Management Office. 

They count as low-risk securities because they’re backed by the UK Government. As long as the government can repay its loans, then your capital will be returned when your treasury bills mature – plus a little extra for your trouble in the shape of the yield. 

You don’t have to worry about capital losses either. That’s because Freetrade won’t let you sell your bills before maturity. 

Which means Freetrade’s Treasury bill service effectively acts like a savings account with a 28-day fixed-rate. 

But as always, the devil is in the detail. Let’s go find him. 

Buying Treasury bills

The Freetrade UK Treasury bills service operates as a separate account alongside your usual ISA, SIPP, and trading account choices. 

This means your Treasury bill holdings aren’t shielded from tax. (See the tax section below for more.)

You can buy fresh Treasury bills every week when Freetrade participates in the DMO’s Friday auctions. 

The minimum order amount is £50.

You’ll discover if your order is fulfilled and the exact yield you’ll earn the following week. Both those outcomes depend on how the DMO auction pans out. 

As each block of bills you own matures, your capital will be returned along with the yield earned as a cash cherry on top. 

Your money will then be automatically reinvested at the next auction date. 

You can switch off the auto-reinvest setting (or change the amount invested) if you don’t want to lock-up all your loot for another month – though this has implications for your yield. 

Treasury bill yields

The amount you earn on each tranche of Treasury bills depends on the yield they achieved at auction. 

That yield is ultimately a function of the Bank of England interest rate plus market supply and demand for ultra-short UK government debt. 

The DMO publishes treasury bill yields achieved. This can give you a feel for how competitive rates are. 

In practice, yields for one-month bills closely track the prevailing Bank Rate. You can also see that the yields shift as market participants anticipate the Bank of England’s interest rate decisions.  

Yields are quoted as annualised yields. That is, they represent the return you’d make if you held the bill for one-year and compounded the proceeds at the same yield. 

This yield figure can be compared against the Annual Equivalent Rate (AER) offered by a bank account. 

However, your Treasury bills mature after 28 days, not a year. So £1,000 of bills earning a 5% yield won’t earn £50 upon redemption.

Instead, after 28 days, you’ll earn:

£1,000 x 0.051 x 28 / 365 = £3.84

Thus your £1,000 pays out £3.84 after 28 days earning a 5% yield. 

Are Treasury bill yields better than easy-access savings rates? 

The one-month Treasury bill yield beat the best easy-access savings accounts at times throughout the last year. But at other times it fell behind, or there was nothing in it. 

When assessing Treasury bills versus savings accounts, the main negatives are:

• Treasury bills bought via Freetrade lock-up your cash for a month at a time. 

• Bills can’t be tax-sheltered in Freetrade’s ISAs or SIPPs. 

• Freetrade is set to charge fees from April that’ll knock from 0.1% to 0.45% off your yield. 

Despite these drawbacks, there is still good reason to consider Treasury bills.

Being a rate tart is a drag. Life is too short to spend on keeping up with best-buy tables, and the micro-frictions of account switching. 

Instead you can be satisfied you’ll probably earn a competitive short-term yield with Treasury bills due to the weekly auction process. 

And so you could settle. Keeping some of your spare cash in bills and auto-reinvesting so it’s always working reasonably hard. 

Are Treasury bill yields better than money market fund rates? 

A quick eyeball of current yields for money market funds suggests there’s little to choose between them and one-month Treasury bills. 

The 12 January Treasury bill tender bagged an average yield of 5.18%. That stacks up against one-day yields of 5.17% to 5.33% for our sample of sterling money market funds. 

In both cases, you’ll need to deduct platform fees – and Freetrade’s percentage fee could be costly if you intend to hold large sums in bills. 

You’d also need to deduct the money market fund’s Ongoing Charge and any trading costs. 

On balance I’d expect a money market fund’s yield to share the ongoing ‘best buy’ competitiveness of Treasury bill payouts. So that’s a wash. 

Rather, the upside of Treasury bills versus money market funds is that bills are less risky and more transparent.

We have previously explained the risks with money market funds. For one they typically hold more corporate debt than you might think given their ‘cash-like’ reputation.  

Meanwhile, the main upside of money market funds is they’re easy access and they can be stashed in your tax shelters. 

UK Treasury bill taxation

UK Treasury bill profits are taxable as income. 

Your yield isn’t paid as interest though. 

Treasury bills are classified as ‘deeply discounted securities’ (DDS) for the purpose of taxation. 

That is, you buy them at a discount to their face value. For example, you may buy £100 worth of bills for £99.60. 

You’ll then receive the full £100 face value when the bills mature. The profit you make from the price uplift represents your yield – around 5% in this case. 

Information on Treasury bill taxation is scanty to say the least. The DMO says:

Although Treasury bills have the same credit risk as gilts – they are sterling denominated unconditional obligations of the UK government – they are not classified as gilts for taxation purposes. Because of this they are covered by the taxation rules which apply to deeply discounted securities. In essence, these specify that if an instrument is issued at a discount of more than 0.5% of its redemption price, (multiplied by the period of a year represented by the maturity of the instrument) they are captured by the deep discount taxation regime. So any profit made by an individual as a result of buying this bill would be charged to income tax as income when realised (i.e. when the bill redeems or is sold on).

HMRC’s tax manual for deeply discounted securities awaits you here. Abandon all hope! 

Monevator reader Roland has pointed us to the Income Tax Act 2007 section 18 which includes profits from deeply discounted securities in its definition of ‘savings income’. 

So it would seem that Treasury bill income can be protected by tax deflectors such as the personal savings allowance and the starting rate for savings. See subsection 3c. An HMRC admin also claims the personal savings allowance does apply.

As always it’s best to consult a tax professional if you’re in doubt.

This isn’t a product widely traded by the general public so no wonder consumer-friendly guidance on the tax position is thin on the ground. 

Freetrade could do its customers a service by stepping into the vacuum and writing up a definitive guide with the help of HMRC or a firm of tax experts.  

As mentioned, Freetrade doesn’t currently enable you to tuck away Treasury bills in SIPPs or ISAs. If that was solved then you wouldn’t have to worry about tax in the first place. 

Risk protection 

Treasury bills are backed by the UK Government. You can assume a default is highly unlikely. 

Intriguingly, the Bank of England’s page on Treasury bills says:

In law it is neither a bill of exchange nor a promissory note, because, being a charge on a particular fund-the Consolidated Fund of the United Kingdom – it is not an unconditional order, or promise, to pay. But the condition of payment implied in the wording of a Treasury Bill, which is only that the Consolidated Fund should be able to meet the payment at maturity, is probably no great deterrent to holders. 

The Consolidated Fund is the Government’s bank account at the Bank of England. (I assume they get breakdown insurance with that.)

This being the UK rather than the US, our system tends to work based on convention and because it always has, rather than because there’s a solemn guarantee tattooed on the Rouge Dragon Pursuivant or written on parchment somewhere…

Are Treasury bills more bombproof than a bank account? It’s easy to assume that the government must sit above a commercial bank in the hierarchy of the national interest. That the QE printing press would always whir to meet short-term debt obligations. 

But governments do default. The UK has defaulted in the past. Our credit rating has been downgraded since the Great Recession, though we’re no basket-case obviously. 

Meanwhile, too-big-to-fail banks were nationalised last time the system buckled in 2008.

And the systemic importance of ensuring people don’t starve probably means that regular old cash is well-protected by the State, up to a point. 

Overall I’m doubtful that opting for Treasury bills amounts to a meaningful advance in risk reduction compared to cash – so long as you stay under the FSCS £85,000 bank deposit limit with the latter. 

The weakest link

On that tip, the FSCS £85,000 investor protection limit applies to Freetrade. 

If the platform went insolvent, and there was a problem recovering the full balance of your account, then you’d be eligible for £85,000 worth of compensation. 

This is the main risk to consider when you think about how safe your cash is in UK Treasury bills held with Freetrade. 

Freetrade UK Treasury bills vs other cash park options

Alright, it’s time to sum up the attractions of Treasury bills versus other cash options:

	Easy access	Fixed term	Fee (%)	Tax-free?	Default risk
Treasury bills	No	28 days	0.1 – 0.45**	No	Government, broker
Bank account	Yes	Yes	0	ISA	Bank
Money market funds	Yes	No	0.1 + platform and trading fee	ISA and SIPP	Fund provider, broker
Premium bonds	Yes	No	0	Yes	Government

** Fee charged from April. Freetrade’s Standard and Plus customers pay 0.1% per annum and Basic customers pay 0.45%. Freetrade don’t charge trading fees.

Whether Treasury bills leap off this table as your latest must-have asset or not, Freetrade is still to be congratulated for offering retail investors a potentially useful defensive option.

There’s no good reason why the UK public shouldn’t be able to invest in Treasury bills.

And bills fulfil the brief of a decent cash proxy: low-risk, low-volatility, and with little chance of leaving your money to rot on an uncompetitive interest rate. 

But there are issues too – mainly the corrosive impact of fees and taxes. 

Right now Treasury bills are a niche product, but if Freetrade can solve the lack of tax shelter access (especially for SIPPs) then there’s a role for the asset as a money market alternative for the bond shy.   

Take it steady,

The Accumulator

*Freetrade links at the time of posting are affiliate links. Such referrals may earn us a small commission if you choose to sign-up. This hard capitalistic reality hasn’t affected anything we’ve written here though.

1. i.e. 5% [↩]

What caught my eye this week.

Charlie Munger used to say that to be really sure of our convictions, we must be able to argue the opposite side.

If you agree and you’re a fan of early retirement, then get yourself a glass of whiskey and/or a couple of Ibuprofen and buckle up to digest the anti-FIRE message loud and clear.

Because this week Jared Dillian of the punchily-named We’re Gonna Get Those Bastards blog took on The FIRE Movement:

Joe graduates from college and gets a job in the cube farm for $80,000 a year. He gets the cheapest apartment possible, rides a bike instead of driving, and eats ramen noodles.

He does this for ten years, saving up to 70% of his income, and investing it in low-cost index funds. At the end of ten years, he has a million or so saved up, more if he is lucky. At that point, he retires to play the guitar or paint happy little trees, and gradually draws down his savings over time.

If the stock market keeps going up as planned, he can stay retired for 50 more years, and get really good at guitar.

This the fucking stupidest thing I have ever heard of in my life.

I enjoyed the post, but then I often link to Dillian’s writing. He swears a lot and takes no prisoners – but hey, it worked for Quentin Tarantino.

Also, I don’t consider feisty articles uploaded into the void as a personal attack, which helps.

But of course there’s a lot that’s wrong in Dillian’s FIRE1 summary.

Nobody serious in ‘the movement’ uses a 12% expected return to underwrite their financial futures, as he claims.

Indeed, when outside-the-movement pundit Dave Ramsey suggested something similar recently, FIRE elders took him to pieces. As for The Accumulator, he is downright parsimonious.

More subjectively, Dillian’s take on whether and why people would pursue a FIRE-forward lifestyle is hyperbolic, and his love of consumption culture seems archaic to me.

That’s okay. We all think differently, and our views evolve too.

Monevator began life as a blog championing early retirement, but I don’t actually believe it’s a good idea for most anymore. We debated the pros and cons a while ago.

However I do love and cherish financial independence. And for me that wouldn’t have been possible if I’d lived life the way Dillian describes.

Know your enemies

It’s good to be challenged, so have a read of the whole article. He makes a couple of fair points as he sprays his gun around. Even if he’s targeting some of the least objectionable people you can imagine.

Where do I agree with him?

Well, I do think someone should probably change jobs if they’re that unhappy, rather than slogging it out for two decades on the prospect of a grand escape.

I also doubt whether most deeply unhappy people will be made happier by having more time to sit around thinking about it. There’s probably something else going on.

Finally, I don’t believe a 50-year long retirement – as in never working for money again – is optimal. In my observation though few truly early FIRE-ees actually end up never working again anyway.

You may think differently. Jared Dillian does. And again, that’s all fine.

One huge virtue of the FIRE concept is it’s not trying to change anybody else’s world. Your politics might have made our country poorer and my holidays more of a hassle. But your savings rate is your own affair. It hurts me not a jot.

Where some see solipsism in FIRE, I see humility and the serenity prayer.

I guess that sounds boring and worthy, and not half as much fun as swearing. Dillian’s post is more entertaining. No doubt it boosted his website traffic.

But you know what else is entertaining?

Being free to do whatever you want to with your weekdays before you’re 50. And not having to care what anybody else – boss, random blogger, or brother-in-law – thinks about it.

Have a great weekend!

[continue reading…]

1. Financial Independence Retire Early. [↩]

A popular daydream for anyone with access to a compound interest calculator is working out how much interest you’d earn on a million pounds. But how do you make a million pounds in the first place?

You could marry a millionaire, but if you’re the sort of person looking to do that then you’re too busy at the gym or on the ski slopes to read Monevator.

You could win the lottery. Good luck! Mathematically it’s illogical to even try, but £2 a week won’t hurt. Or you could buy a few Premium Bonds.

You could start a business, but beware that’s very risky. (On that score, don’t blog to get rich. You’ll starve).

Some people make by developing property. However once you get beyond owning your own home this is really another form of business.

That leaves saving your surplus income and investing it to make your million.

How realistic is it to become a millionaire this way?

Make a million pounds by saving and investing

Saving and investing your way to a million pounds may seem a daunting task.

For most of us, it is. But it is far from impossible.

How you make your million by investing depends on three factors:

• The amount you save every month
• The rate of growth of your investments
• The length of time your money has to grow

Let’s ignore another factor here, which is tax and pensions. If you’re a taxpayer, the Government gives you tax breaks which effectively increase the size of your monthly savings without you having to save any more money. You’ll reach a million quicker, all things equal. But the downside is your money is locked away in a pension. You’ll be taxed on the income when you withdraw it, too.

Everyone’s tax situation is different, so in articles like this it’s best to ignore tax. But you shouldn’t when doing your own sums!

What will you earn on your portfolio?

The rate of growth in your investments (also known as the return) will depend on where you put your money – and how lucky you are!

There are no guarantees and much swearing and death threats discussion about what is likely. But just to give you a ballpark idea of long-term expected returns:

• Cash and government bonds could earn 2-4% a year
• Corporate bonds could early 4-6% a year
• Commercial property might earn 6-8% a year
• Equities (shares) could earn 8-10% a year
• Riskier equities like small caps or emerging markets might hit 10-12% or more

These returns are inclusive of inflation, which will reduce the spending power of your money over time.

The important point is cash is the least-risky asset, but it offers the lowest prospective returns. Each successive asset is riskier but a better bet for the long-term.

Put your money into small cap stocks for example and you’ll have to stomach some daunting volatility along the way. However you might be more likely to get to a million before you get a bus pass.

Can you beat these returns by share trading? If you’re an amazing share picker or Warren Buffett you might make as much as 15-20% a year. But very, very few people can do that for long. If you’re one of them, you’ll probably already know it.

Note that most people generally invest in a range of assets for portfolio diversification purposes. This reduces the volatility, but it can be expected to reduce overall returns, too.

It’s also worth knowing that the longer you hold your assets, the more likely you’ll enjoy their average historical return.

Share prices, for instance, jump around all over the place in the short-term.

But as your holding period increases from months to years to decades, your returns tend towards the average.

How much must you save a month to make a million?

The following table tells you how much you need to save every month to make a million within different time periods, and with different rates of growth.

Cross-reference the growth rate in the top row with the  length of time you can endure it until you’ve got your million pounds.

Where time and growth intersects is the monthly amount you’ll need to save:

	4%	6%	8%	10%	12%	15%
5 years	£15,061	£14,322	£13,621	£12,958	£12,330	£11,449
10 years	£6,795	£6,125	£5,516	£4,964	£4,464	£3,802
20 years	£2,739	£2,195	£1,746	£1,381	£1,087	£754
30 years	£1,455	£1,021	£705	£481	£325	£178

What about inflation? I’ve ignored it here, because this article is about making a million pounds in nominal terms. In reality a million pounds will buy far less in 20 or 30 years. A shortcut is to read the column to the left of your expected returns. So if you expect to make 8% a year, read the column for 6%. This allows a couple of percent for inflation.

Have a play around with different rates, time periods and monthly savings amounts using our calculator.

A million pounds is certainly not what it used to be. However you’ll soon discover it is still very hard for the average person to make a million pounds quickly through investing.

A million pounds is also an arbitrary number. You’re better off working out your own sustainable plan to reach your financial goals – one that you can stick with for the long haul!

Try our millionaire calculator or see the interest on a million pounds.