What are Gilts and Bonds?

Bonds and gilts are often described as the steadier side of investing. While shares tend to grab the headlines, bonds play a crucial role in many investment portfolios by offering income, stability and diversification.

For UK investors, gilts (also known as UK government bonds) are one of the most familiar types of bonds. They are commonly used by people looking for lower-risk investments, predictable returns, or a way to balance out more volatile assets like equities.

In this guide we explain what bonds and gilts are, how they work, the different types available in the UK, and how you can invest in them.

We’ll also cover the risks to be aware of and help you decide whether bonds and gilts are right for your financial goals.

What are bonds and gilts?

Bonds and gilts are types of investments that allow you to lend money in return for interest and the return of your original investment. However, there are some distinct differences.

What is a bond?

A bond is a type of loan that investors make to a government or a company. When you buy a bond, you are lending your money to the issuer for a fixed period.

In return, bondholders usually receive:

• Regular interest payments, sometimes known as coupons.
• Repayment of the original investment when the bond reaches its maturity date.

Some key bond terms you’ll often see include:

• Issuer – the organisation borrowing the money.
• Coupon – the interest rate paid on the bond.
• Maturity – the date when the bond ends and the capital is repaid.

What are gilts?

Gilts are similar.

These are essentially a type of bond that’s only issued by the UK government. When you invest in gilts, you are effectively lending money to the government to help fund public spending.

Gilts are issued by the UK Debt Management Office on behalf of the government. Because they are backed by the state, they’re considered among the lowest-risk investments available in the UK.

What’s the difference between bonds and gilts?

While gilts are a type of bond, not all bonds are gilts. The main differences come down to who issues them, the level of risk involved and potential returns.

Before comparing them in detail, it helps to see the key distinctions side by side:

In simple terms, gilts trade potential returns for stability, while other bonds may offer higher income in exchange for greater risk.

How do bonds and gilts work?

Despite being similar investment options, they work slightly differently. Here’s how they work.

How do bonds work?

Bonds work by paying investors interest over a set period and returning the original investment when the bond reaches maturity. When you buy a bond, you are lending money to a government or a company in exchange for these payments.

Once issued, bonds can be bought and sold on the secondary market. Their price can rise or fall depending on factors like changes in interest rates, inflation expectations, and the financial health of the issuer. If you hold a bond until maturity, you should receive its full face value, provided the issuer does not default.

How do gilts work?

Gilts work in much the same way as other bonds, but they are issued by the UK government. Investors receive regular interest payments, known as coupons, and the return of their capital at maturity.

Like bonds, gilts are traded on the secondary market, so their value can change over time. Gilt prices are particularly sensitive to interest rate movements and inflation expectations. If you hold a gilt until it matures, you should receive the full value back, as long as the UK government meets its obligations.

Why do people invest in bonds and gilts?

Depending on the financial standing of a government or company, there are many reasons why investors choose to diversify their portfolio with bonds and gilts.

Stability and lower risk

One of the main reasons people invest in bonds and gilts is stability. Compared to shares, bonds usually experience smaller price swings.

Gilts are often used for capital preservation because they are backed by the UK government. While shares can deliver higher long-term growth, bonds can help smooth out short-term volatility in a portfolio.

Regular income

Bonds and gilts typically provide predictable income through regular interest payments. This makes them attractive to investors who rely on steady cash flow.

They are especially popular with retirees and those approaching retirement, who may prioritise income and stability over growth.

Diversification in a portfolio

Bonds and gilts play an important role in diversification. Because they often behave differently from shares, holding both can reduce overall portfolio risk.

In balanced portfolios, bonds are commonly used to offset the ups and downs of equity markets, helping to protect long-term investment plans.

What are UK government bonds (gilts)?

There are several types of gilts available to UK investors:

• Conventional gilts – Pay a fixed rate of interest and return a set amount at maturity.
• Index-linked gilts – Interest and capital rise in line with inflation.
• Short-dated gilts – Mature in under 7 years.
• Medium-dated gilts – Mature in 7–15 years.
• Long-dated gilts – Mature in over 15 years.

Each type suits different investment goals, time horizons and capacity for risk.

Risks to consider before investing in bonds or gilts

Although bonds and gilts are generally considered lower risk than shares, they still carry some important risks that investors should understand before buying in.

Interest rate risk

Bond and gilt prices usually fall when interest rates rise, because newer issues may offer higher returns. This means you could receive less than you paid if you sell before maturity.

Inflation risk

Inflation can reduce the real value of fixed interest payments over time, meaning your income may not keep pace with rising living costs. Index-linked gilts are designed to help manage this risk.

Credit and default risk

With corporate bonds, there is a risk that the issuing company may be unable to make interest payments or repay your investment. Gilts generally carry lower credit risk as they are backed by the UK government.

Liquidity risk

Some bonds and gilts may be harder to sell quickly, especially during periods of market stress. This could mean accepting a lower price if you need to access your money sooner than planned.

How to buy bonds and gilts

1. Decide what to invest in – Choose between bonds, gilts, or bond and gilt funds based on your goals and attitude to risk.
2. Choose an account – Bonds and gilts can usually be held in a ISA, pension, or general investment account.
3. Use an investment platform or broker – Most individual investors buy bonds and gilts through an online investment platform or stockbroker.
4. Select your bonds or gilts – Review key details such as the issuer, interest rate (coupon), maturity date, and current price.
5. Place your investment – Check dealing charges and fees, then complete the purchase (gilts are often traded in £100 nominal units).
6. Hold or sell – Receive interest payments and repayment at maturity or sell earlier at the market price.

Need more investment advice?

If you’d like help understanding what investment products and financial services are available to you, LV= can help.

Our financial advisers can support you with tailored advice, and we offer a range of investment options including ISAs, smoothed managed funds, and long-term investment solutions.

You can also explore our guides section to continue learning or contact us to speak to a professional financial adviser about your next steps

Bonds and gilts FAQs

Are gilts a good investment?

Gilts can be a good investment if you’re looking for stability and predictable income. They are backed by the UK government, making them lower risk than shares. However, returns can be modest, and their value can fall if interest rates rise or inflation is high.

Can you lose money on bonds or gilts?

Yes, it’s possible to lose money on bonds and gilts. If you sell before maturity, their market value may be lower than what you paid, especially if interest rates have risen. Inflation can also reduce the real value of your returns over time.

Are bonds and gilts good for beginners?