Master fixed-income investing with government bonds, corporate bonds, and building a stable income portfolio for 2025 and beyond
A bond is essentially an IOU - you lend money to a government or company, and they promise to pay you back with interest. UK Gilts are bonds issued by the British government - called gilts because the original certificates had gilded edges.
Face Value
£100-£1,000
Amount bond pays at maturity
Coupon Rate
2-6% typical
Annual interest rate paid (e.g., 4% = £40/year on £1,000 bond)
Maturity Date
5-30 years
When you get your principal back
Yield
Market-based
Actual return based on current market price
Credit Rating
AAA to D
Measures default risk
You buy: £1,000 UK Gilt with 4% coupon, 10-year maturity
You receive: £40 every year for 10 years
At maturity: £1,000 back + final £40 payment
Total return: £400 interest + £1,000 principal = £1,400
Effective annual return: 4% (if held to maturity)
Bonds issued by the UK Treasury. Considered very safe - the government has never defaulted. Ideal for conservative investors seeking stable income.
Issued by companies to raise capital. Higher yields than gilts but higher risk. Blue-chip companies (BP, Tesco, Vodafone) offer investment-grade bonds.
UK government bonds where payments adjust with inflation (RPI). Protects purchasing power but typically lower initial yield.
Bonds from companies with lower credit ratings. Much higher yields but significant default risk. Not suitable for beginners.
See how bond investments grow with fixed income payments
Total Return
£1,400
If you buy a bond for less than face value (£950 instead of £1,000), your yield is higher than the coupon rate. If you buy at a premium (£1,050), your yield is lower. This is why bond prices move inversely to interest rates.
Example: Rising Rates
You own a £1,000 gilt paying 3% (£30/year). Bank of England raises rates, new gilts now pay 4% (£40/year). Your 3% gilt becomes less attractive, so its market price drops to ~£925 to match the new 4% yield.
Example: Falling Rates
You own a £1,000 corporate bond paying 5% (£50/year). BoE cuts rates, new bonds only pay 3%. Your 5% bond is now premium, so its price rises to ~£1,100 as investors pay extra for higher yield.
As of 2025, UK base rate is around 4.5-5%. If rates continue falling (as expected), existing gilt holders benefit from capital gains. However, if inflation resurges and rates rise, bond prices will fall. Consider holding bonds to maturity to avoid price volatility.
| Feature | UK Gilts | Corporate Bonds | Stocks | Savings Account |
|---|---|---|---|---|
| Risk Level | Very Low | Low-Medium | High | Very Low |
| Expected Return | 2-4% | 3-7% | 7-10% | 4-5% |
| Income Stability | ✅ Fixed | ✅ Fixed | ❌ Variable | ✅ Fixed |
| Capital Growth | ❌ Limited | ❌ Limited | ✅ High potential | ❌ None |
| Liquidity | ✅ Good | ⚠️ Medium | ✅ Excellent | ✅ Instant |
| Inflation Protection | ❌ No (regular gilts) | ❌ No | ✅ Yes | ❌ No |
| Tax Treatment | No CGT | Income tax + CGT | Income tax + CGT | Income tax |
| Minimum Investment | £100-£1,000 | £1,000+ | £1 per share | £1 |
Best for most investors. Use platforms like Hargreaves Lansdown, AJ Bell, or Interactive Investor.
Buy a basket of bonds through a single fund. Easiest option for beginners seeking diversification.
Buy new gilts directly from UK Debt Management Office. No fees but limited selection.
Vanguard UK Gilt UCITS ETF (VGOV)
Tracks UK government bonds across all maturities. TER: 0.07%
iShares Corporate Bond Index Fund
Investment-grade UK corporate bonds. TER: 0.15%
iShares UK Gilts 0-5yr UCITS ETF
Short-dated gilts, less price volatility. TER: 0.07%
SPDR Bloomberg 1-5 Year Gilt UCITS ETF
Near-term gilts, stable income. TER: 0.10%
Hold corporate bonds and high-yield bonds in your ISA to shelter the income and gains from tax. Regular gilts can be held outside ISA since they are already CGT-free.
Allocation:
Goal:
Stability and emergency buffer. Most growth still from stocks.
Allocation:
Goal:
Balance growth with capital preservation. Build income stream.
Allocation:
Goal:
Capital preservation and reliable income. Reduce volatility for retirement.
Instead of buying one 10-year gilt, buy 10 gilts maturing in years 1, 2, 3... 10. As each matures, reinvest in a new 10-year bond. This provides regular cash flow and reduces interest rate risk.
Example: £10,000 spread across 10 gilts = £1,000 maturing each year with predictable returns.
When BoE raises rates, bond prices fall. Long-dated bonds (20-30 years) are most sensitive. A 1% rate rise can cause 10-20% price drop in long gilts.
Fixed coupon payments lose purchasing power over time. 3% gilt with 4% inflation = -1% real return. Index-linked gilts protect against this.
Company may default and fail to pay. Stick to investment-grade (BBB+ or higher). Diversify across multiple issuers to reduce risk.
When bond matures, rates may have fallen. Your £1,000 that earned 4% may only get 2% on reinvestment. Consider bond ladders to manage.
A 10% yield usually means 10% risk. If gilts pay 3% and a corporate pays 10%, ask why. High yield often = high default risk. Stick to investment-grade (A- or better) unless you know what you are doing.
A 30-year gilt is much more volatile than a 2-year gilt. Long bonds can swing 15-20% in price. If you need money soon, stick to short-dated bonds (under 5 years) for stability.
A 3% gilt seems safe but loses money if inflation is 4%. Always check real return (nominal yield minus inflation). Index-linked gilts automatically adjust for rising prices.
Bond yields are already low (3-4%). Do not let 1% annual fund fees eat half your return. Use low-cost ETFs (under 0.15% TER) or buy individual gilts with one-off dealing fees.
When rates rise and bond prices drop 10%, many investors panic-sell. If you hold to maturity, you still get full face value plus coupons. Price volatility only matters if you sell early.
Use age-based rule: Bonds = Your Age (e.g., 40 years old = 40% bonds). Adjust based on risk tolerance and time horizon.
Beginner: Start with bond ETF (VGOV or similar) for instant diversification.
Intermediate: Mix of gilts + bond funds in ISA/SIPP for tax efficiency.
Hargreaves Lansdown, AJ Bell, or Interactive Investor. Look for platforms with wide gilt/bond selection and low dealing fees.
Start with £1,000-5,000 in a broad gilt ETF or 5-year UK gilt. Reinvest coupons or take as income depending on your stage of life.
Review your stock/bond split yearly. If stocks surge, sell some and buy bonds to maintain target allocation. This locks in gains and reduces risk.
Build a balanced portfolio with bonds, stocks, and alternatives
Maximize tax efficiency with ISAs and SIPPs for bond investments
Use bonds in your pension for stable retirement income
Monitor your gilt and bond holdings with Trio Wealth AI-powered portfolio tracker