Why choose gilts or bonds?
Traditionally lower-risk, predictable investments that are easy to buy and sell
Gilts and other bonds are considered to be lower-risk investments compared to shares but can still deliver a better return than cash on deposit. They are simple to buy and sell, and some are even exempt from capital gains tax.
The prices of gilts and bonds tend to move more predictably – and less suddenly – than those of company shares. While this means a quick profit is less likely, there is also less chance that you will lose your money altogether. Gilts and bonds are considered lower risk investments, suitable for more cautious investors.
Even if your main investment focus is on shares, keeping some of your portfolio in gilts or bonds can be a useful way to manage your overall risk.
Get steady, predictable returns
When you buy a bond or gilt you know exactly how much to expect as a return. An individual bond typically costs £100. It has a stated rate of interest (the “coupon”) which it will pay every year for a set period. If you still own the bond at the end of this period – when it “matures” – you get your £100 back.
For example, a 5-year bond with a value of £100 and a coupon of 2.5% will pay you £2.50 a year for 5 years, after which you get your £100 back and keep the interest. Simple.
Sell at any time
In practice it is unusual to buy a bond when it is issued and hold it to maturity. You can buy and sell bonds on the market at any point during their life – the price will depend on the coupon and how long it is until the bond matures.
For example: you pay £100 for a new UK Government bond (called a “gilt”) that pays 2.5% for 5 years. After 2 years the Government cuts interest rates on new 3-year bonds to 1.5%. Your bond is now probably worth more than the £100 you paid for it, because it promises 3 further years of interest at 2.5% while new issues only pay 1.5%.
Pay no capital gains tax
Any profit you make from buying and selling gilts (and some corporate bonds) is exempt from capital gains tax. You still pay income tax on the interest you earn – unless your bonds are held in an ISA or other tax-free account.