A so-called “gilt ladder” lets you line up a series of government bonds to deliver a low-risk pipeline of income in the years ahead.
We’ve spoken to investment experts to find out how gilt ladders work, and what you need to know to build your own.
Gilts explained
Before you start thinking about gilt ladders, it’s important to first understand what gilts – or government bonds – are.
“Gilts are bonds issued by the UK Government to borrow money from investors,” explained Wayne Nutland, senior investment manager at Shackleton Advisers. “In return for lending money to the Government, investors typically receive a fixed rate of interest, known as a coupon and are repaid the bond’s face value when it reaches maturity.”
As you are lending money to the Government, gilts are considered one of the lowest-risk investment options available.
When you buy a gilt, the price you pay will depend on factors including interest rates, inflation and demand, and you can sell them before they mature if you wish.
As a guide, when interest rates rise, gilt prices fall and the yields go up.
When interest rates fall, gilt prices would be expected to rise and yields would drop.
Capital losses would only happen if you sold your bond before it matured, or in the unlikely event of a default.
Income paid by gilts is taxed like any other income (unless it’s held in a tax-free wrapper such as an Isa or pension), but capital gains are tax-free.
What is a gilt ladder?
A gilt ladder is a portfolio made up of UK government bonds that all mature at different times, explained Hal Cook, senior investment analyst at Hargreaves Lansdown.
“Each gilt is effectively one rung of the ladder. The attraction is that you can build the ladder around when you expect to need your money. Gilts largely have fixed returns, so when you buy one you know the interest payments it is due to make and how much will be repaid when it reaches maturity. That can make future cash flow much easier to plan.”
What a gilt ladder can do
“A gilt ladder can be useful for an investor seeking greater certainty over near to medium-term cash flows, rather than relying on selling risk assets when markets are weak,” said Ben Cope, portfolio manager at Evelyn Partners.
Retirement income is the obvious use, said Mr Cook. “Most people still need some exposure to investments with the potential to grow over a long retirement, but their immediate priority is also making sure there’s enough money available to pay the bills. A gilt ladder can form one part of that plan, with gilts maturing at different points to provide lump sums alongside pension income and other investments.”