Get ahead of the crowd with Premium
Register Forgot password

Gilts: the easy way to invest in them

Moneymagpie Team 21st Oct 2020 14 Comments

Reading Time: 8 minutes

What are gilts, who should invest in them, and how on earth do you get them? Ponder no more: here’s your no-fuss step-by-step guide to gilt investments.


What are gilts?

Gilts are government bonds: investors (that could be you!) essentially loan money to the government for a period of time. Over that term, you’ll get regular interest payments, and then the original investment is paid out at the end of the term.

Why do government bonds – or gilts – exist? Just as you or I might go to a bank to raise a loan for a car or a mortgage for a house, the government comes to us, en masse, to raise some cash to spend on things the country needs, like extra defence funding or infrastructure improvements. They are similar to corporate bonds except they are raised by entire governments rather than companies.

In return for this very kind loan from you, the government promises to pay you interest for every year you loan them this money.
As with so much in the world of investing, the whole ‘risk and reward’ principle very much applies to gilts. If you’ve ever tried to borrow money from banks, you’ll have noticed that lenders will first try and calculate whether you’re good for the loan or a bit of a dodgy customer.

They’ll do a credit check on you first. If they think they have a good chance of getting their money back from you they’ll offer you a nice low interest rate. However, if they think you could potentially default, they’ll cover themselves by insisting on a high interest rate so they can rake in a hefty wedge of cash early on before you do the dirty on them.

It’s the same in reverse when you invest in bonds. You’re the one lending to them so you want to know how good the governments or companies you lend to are for the loan. Some (particularly certain companies) could be very risky so they offer a quite high rate of return. You could make a princely sum from your investment – or potentially lose it all. Others, like nice, safe European governments such as our own, are pretty solid (it may not feel like it at the moment, but other governments are, let’s say, a bit dodgy), so they only offer a low interest rate. However, you can be pretty safe in the knowledge that you’ll get your cash.

Who should buy gilts?

Gilts are good for those who are looking for a very safe, fixed income. They’re also helpful if you are looking for something stable to add to a more adventurous set of investments.

They’re useful and sensible for people who are planning retirement soon or have already retired and want a fixed income. Gilts also provide an option for those who already have a lot of other sexier high-risk investments and would like something solid to underpin their portfolio.

But for young investors, unless you’re the sort who likes to wear two pairs of pants ‘just in case’, you should look on them as something to know about for later.
Still interested? Read on!

How they work

When you buy a gilt, you’re effectively lending money to the government and it promises to pay you a certain amount in interest each year for that loan. The interest is usually fairly low and can look very low relative to the rates you could get on savings bonds.

However, gilts are inversely related to the Bank of England base rate. That means when the base rate is high, the interest rate on gilts is low. When the base rate is low, however, the interest rate on gilts is higher and more appealing.

So, at the moment, with the paltry interest we gain from savings thanks to the low base rate, gilts could be a great option. If the base rate goes up, however, you could miss out on the advantages of higher-interest savings products that become available.

Gilts are also usually a long-term investment that can last decades – although short-term 5-year gilts are becoming more popular. A medium-term gilt is between 5-15 years long, and a long-term is anything over 15 years.

The art of gilt investments is balancing the potential gains of a long-term investment against anticipated fluctuations in the base rate. So, if you think the base rate is likely to go high and stay high for many years, other investments may be more suitable. At present, however, gilts are still an attractive option for investors seeking a stable and reliable income from their portfolio.

You can also buy ‘undated gilts’. As the name implies, these theoretically carry on paying interest forever, without ever being redeemed. However, you have to be a bit careful with them, since they’re not actually as undated as they sound and some could actually get redeemed in due course. They tend to have low interest rates and therefore their price tends to be quite a lot lower.


The price of gilts

Gilts have a specific price at which you buy them, and that price is generally related to how impressive their interest rate seems at the time.

If basic Bank of England interest rates are low, the rates on bonds will look good so the price of gilts generally will be higher – in other words you pay a premium, more than ‘par’ (face value). This means that what you actually make overall on the bond (the amount it all adds up to when the term of the bond ends) will go down. However, if basic Bank of England interest rates go up then bond rates will look unimpressive so their price will fall (it will be sold ‘under par’) and therefore their overall bond yields will rise.

For example, a bond with a face value of £100 might sell for £105, meaning at a £5 premium. Or, you might find a bond of £100 value selling at £95 meaning you bought at a discount.

Think of it like buying concert tickets. You can buy them from the venue at the face value – or from a second-hand dealer. If the concert is sold out and really popular, the price will be higher than the face value on the ticket. If they can’t sell out the seats, you could get a discounted ticket that costs less than the face value.

When you come to redeem these gilts – in other words, when they come to the end of their terms – you’ll redeem them at the nominal price of £100 per gilt. So, if you bought them at £95 you’ll make money on the sale, if you bought them at £105 you’ll lose some. It’s important, then, to make sure that bonds you buy ‘above par’ have enough of an interest rate payment each year to more than make up for the loss you make at the end.


How to work out how much you’ll make

There are two main things you should consider if you buy gilts:

1. The price of the gilt (per £100-worth) and
2. The coupon (interest rate) being offered.

If a gilt is offering a low interest rate, relative to average rates for savings accounts, it’s likely to be selling at a discount. You could find that you only have to pay, say, £96 for £100-worth of a particular gilt. Or if the gilt’s interest rate is looking rather attractive it might be selling at £106.

It’s a choice for you – do you want to have the capital growth or do you want to have the higher interest payments?

You can invest as little as £1 in gilts but people generally buy them in multiples of £100 which is how they are displayed in the boring-looking columns in the financial pages of broadsheet newspapers. For example, if the government wanted to raise £1 billion to be repaid in 2025 with a fixed interest rate of 4.5% they would issue gilts called something like ‘4.5% Treasury 2025’.

Don’t forget inflation

Given that the interest rate of gilts is fixed – often for a long time (it could be decades) do you think that it will cover inflation and beat average savings rates over that time? The longer your gilt lasts, the more of a gamble it is as no one can see into the future and no one can accurately predict the movements of interest rates over time.

You can get index-linked gilts where the interest paid and the redemption amount rise in line with inflation. In fact, it’s not quite as good as this, because they lag inflation by three months. However, they can be a good option if you’re planning on keeping your gilts for many years – the longer you keep a fixed-income investment the more it is affected by inflation.

Still, index-linked gilts, not surprisingly, tend to offer a lower interest rate than the fixed ones. Again, it’s a gamble you have to consider and there are no definite answers. You will need to get your calculator out and work out the difference over time (assuming at least 2.5% inflation each year). If you’re looking for low-risk investments, it probably doesn’t get much lower than this.

How to buy gilts

You can either buy gilts directly or you can invest in gilt funds.

On the whole it’s best to buy gilts direct rather than doing it through a fund. That way, not only do you avoid paying a management fee (the fund managers like to take their pound of flesh before putting your money to work) but also if you hold actual gilts you don’t pay capital gains tax on them.

Occasionally, the government has new gilt ‘issues’, and they’re often sold direct to the public either at a fixed price or by tender or auction. You can find out about forthcoming issues at the website of the government’s Debt Management Office (DMO). The advantage of buying a new issue of gilts is that there’s no dealing commission, which you would have to pay if you buy ’second-hand’ gilts (from other people) so that cuts down on your costs.

However, there are a few hoops you will need to jump through first:

  • You need to apply and register with Computershare Investor Services, an outsourced agent of the government’s Debt Management Office.
  • You need to be accepted onto the Approved Group of Investors before you can start buying government gilts. (This is to verify things like your basic identity and your sources of funds to avoid money laundering).

You can also buy gilts through most stockbrokers, just like you can buy shares. You don’t usually need to join the Approved Group of Investors using this method – though the stockbroker will have their own checks. If you go via a stockbroker, or through an investment fund, your fees for buying and managing the gilts may cut into your profits.

It used to be the case that you could buy gilts through the Post Office or direct from the Bank of England but you can’t anymore, which is a shame as buying through the Post Office seems a nice, easy way to do it.

We suggest you set up an online stockbroking account – an execution-only service – just as you would for buying shares. It’s free to register and you don’t have to buy anything immediately once you have your account. You can join now and wait for months before you invest in anything. However, once you do trade it will be very cheap to buy and sell gilts and you’ll have constant access to your investments.

There are so many options for online stockbroking accounts we recommend you spend plenty of time finding one that suits you.

Some, like eToro, will have no commission to pay and no transfer fees for your buy/sell transactions. However, they may not offer the widest or best investments for you or have other fees that could eat into your profits.

Other online stockbroker accounts, such as Hargreaves Lansdown, will charge fees but have other offerings such as managed funds for you to consider.

When you sign up to an account, you’ll need to confirm that:

  • You’re a private individual aged 18 or over
  • You’re a UK resident
  • You’re a British national

You’ll also need:

  • Your address details for the past three years
  • Your debit card details
  • Your National Insurance number

Once you’ve set up your account, including passing any identity checks, you’re ready to go! You can credit your account with a money transfer and use that to invest in some gilts.

There – that didn’t hurt did it?

You can also invest in gilts using an Exchange Tracker Fund (ETF). Check out our gilt fund guide here to find out more!

*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.

3.8 4 votes
Article Rating
Notify of

Inline Feedbacks
View all comments
9 years ago

change in td direct policy, they now only deal over the phone on gilts so that is a £40 charge

Jasmine Birtles
9 years ago
Reply to  philippe

That’s useful to know. Thanks Philippe

11 years ago

Thank you for the information – really helpful

11 years ago

Your information about opening an account is just downright sloppy. To start with the first link to TD Direct Investing goes to something called “trade doubler”. Being suspicious (this was NOT what I was expecting) I exited immediately.

Once you DO get to the TDDI website, opening an account requires you to deposit £100, which you seem to have forgotten to mention. Finally the dealing price you quote £8.95 is only for FREQUENT dealing, otherwise it’s £12.50 per transaction.
Given these basic mistakes you’ve made, can anyone have any confidence is anything else you’ve written?

Geoff Scotton
Geoff Scotton
13 years ago

Is it possible for a registered charity (not an individual) to set up an account to trade in gilts?

Michelle Harrington
Michelle Harrington
13 years ago

Is there a daily limit on the amount which you can invest into gilts on a daily basis?
Somewhere I thought there maybe a limit of £25 000, but am uncertain now

June Earll
June Earll
14 years ago

The minute I initially read this posting, I felt kind of baffled. I understand finally.

14 years ago

I know gilts have to have at least 5 years to maturity in order to put them in an ISA, but do undated gilts fall into this category or are they a “breed apart”?



Paul Prowse
14 years ago
Reply to  Paul

Hi Paul

As long as your gilt meets the 5 year rule, you should be able to wrap it in an ISA – whether it’s undated or not.

14 years ago
Reply to  Paul Prowse

Thanks Paul!


14 years ago

Hi Jasmine, Spotted a few mistakes: 1. If you wish to buy gilts through a stockbroker, you do not need to join the Approved Group. The Approved Group is only for stockholders who wish to use the DMO’s purchase and sale service (which Computershare is operating on behalf of the Bank of England), both for purchasing and selling gilts on the secondary market, and for purchasing gilts at auctions. Stockbrokers have their own checks, both for new and existing clients. 2. The index-linked gilts which are now issued have a 3-month index lag instead of an 8-month one. They have… Read more »

Jasmine Birtles
14 years ago
Reply to  Helene

Thank you so much for that Helene. Really helpful! We’ll make the corrections.

Rosetta Blanford
Rosetta Blanford
14 years ago

Hi, nice blog. How do you avert getting spam comments?

Jasmine Birtles
14 years ago

All comments have to be ratified by us. We remove spam if we see it.

Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

Send this to a friend