This article is for information only and isn’t personal financial advice. Investing can help your money grow, but the value of investments and any income can rise and fall, so you could get back less than you put in. Yields are variable and not guaranteed, and past performance isn’t a guide to the future.
Remember, tax rules can change and benefits depend on individual circumstances.
What should you consider when choosing a gilt?
There’s no single ‘best’ gilt for every investor. The right choice depends on factors including whether you want income or capital growth, when you’ll need your money back, and how much price movement you’re comfortable with.
Read this article alongside HL’s gilt yield comparison page, which can help you compare the options available.
Are you investing for income or capital gains?
A key consideration is whether you’re investing for income or hoping to benefit from gilts’ exemption from capital gains tax.
If you want higher six-monthly interest payments, you might focus on gilts with higher coupons. The coupon, quoted as a percentage, is the annual interest paid by the gilt. These payments are fixed even if the gilt’s price changes. They’re usually made twice a year, with each payment equal to half the annual coupon.
Coupons currently range from 0.125% to 6% a year. That’s a significant difference, so investors seeking income are likely to focus on gilts towards the higher end of the range.
Investors looking to benefit from gilts’ exemption from capital gains tax are likely to take the opposite approach. Retail investors who hold gilts directly might favour lower-coupon gilts, so that more of the return comes from a capital gain rather than taxable income.
Gilt coupon payments are generally taxed at your marginal rate of income tax. In a general investment account, a lower-coupon gilt could therefore deliver a higher return after tax than a higher-coupon gilt with a similar maturity date. This can be particularly relevant for higher- and additional-rate taxpayers, although basic-rate taxpayers should also take it into account.
What if you’re investing through an ISA or SIPP?
If you buy gilts in a tax-efficient wrapper such as a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP), the overall return and maturity date are likely to matter more. Returns within these wrappers are sheltered from UK income tax and capital gains tax, so the split between coupon payments and capital gains is less important.
That said, fixed coupon payments could appeal to investors using these wrappers for income. They provide regular cash payments into the account holding the gilt, which can then be withdrawn as needed. Remember that withdrawals from a SIPP in retirement can be subject to income tax.
When will you need the money?
If you plan to hold a gilt until maturity, start with its yield and maturity date. You might be investing towards a known future expense, such as buying a home, starting a business, or paying school or university fees.
It makes sense to focus on gilts that mature around the time you’ll need the money. At least three gilts mature in each year up to 2036, giving investors a broad range of short- to medium-term options.
Once you’ve identified gilts with suitable maturity dates, compare their yields. Gilts maturing at similar times often offer similar yields, but differences can still arise. If you have no preference between income and capital growth and you’re investing through a tax-efficient wrapper, compare the headline yields using the 0% tax rate and consider whether the highest-yielding option meets your needs. If you’re investing outside a tax-efficient wrapper, use the yield column that reflects your marginal rate of income tax.
What if you expect gilt yields to fall?
Some investors don’t intend to hold a gilt until maturity and instead hope to benefit if gilt yields fall. Gilt prices and yields move in opposite directions, so falling yields generally mean rising prices. An investor might then be able to sell the gilt for a profit before it matures.
However, gilt yields can rise as well as fall, causing prices to drop. If you need to sell before maturity, you could get back less than you invested.
Duration is an important consideration if you’re investing based on expected changes in gilt yields. Measured in years, it indicates how sensitive a gilt’s price is to changes in interest rates and yields. The higher the duration, the more sensitive the price is likely to be. Gilts with longer to run until maturity typically have higher duration.
Long-dated gilts, therefore, tend to experience larger price movements than shorter-dated gilts. This can increase both potential gains and potential losses over shorter periods.