Building a ‘gilt ladder’ – everything you need to know

A “gilt ladder” is a portfolio of gilts, where the bonds mature at different times to form rungs of a “ladder”.

The gilts are bought so that an investor can plan out their returns, such as to fund a retirement or pay for a serious of expenses, like school fees.

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There are many factors to consider when building a gilt ladder. In this article, I run through the key considerations for investors looking to lock in returns from the UK government.

What are gilts and how do they work?

Gilts are debt instruments issued by the UK government, that can be traded by investors. When you own a gilt, you are effectively lending money to the government.

Unlike most bonds issued by companies (corporate bonds), gilts are easy to buy and sell for regular investors.

They redeem at £100 and are issued around that price, making it possible for retail investors to participate in the market. interactive investor also offers access to auctions, and they also trade in secondary markets.

Gilts work by paying investors two coupon payments a year and returning the £100 principal on maturity. Annualised yields for investors holding gilts to maturity now range from 4.3% for the shortest bonds to around 5.4% for the longest bonds.

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Yields have shot up over the past few months due to worries about inflation and economic growth in the UK. Because the outlook has deteriorated, investors are now demanding a greater return to lend money to the UK government.

Gilts have a tax quirk attached to them – there is no capital gains tax to pay on the difference between the buying and the selling (or redemption) value of the gilt. Because lots of gilts were issued before 2022 with very low coupons, there are many gilts that trade well below their redemption value, so capital gains are a key part of the return.

If a gilt trades around its £100 par value, then the coupon will be the driver of the returns.

Because gilts are backed by the UK government, the default risk is extremely low – gilts are considered the risk-free return that UK-based investors can achieve over set periods.

The very low-risk, elevated yields, and discounted gilts available today make this asset class a very powerful investment tool.

What is a gilt ladder?

A gilt ladder is a portfolio of gilts, with staggered maturities, to achieve an income stream over a set period.

While investors today may be looking at high long-maturity gilt yields, such as the 5.4% on offer from a 30-year gilt, a gilt ladder has a number of advantages of just owning one bond.

Using a “ladder”, an investor can break down their cash flows into smaller blocks, rather than just buying a single, possibly very long maturity, gilt. When the shortest gilts mature, the return can be then invested into longer maturity gilts, adding a another rung to the ladder. Or they can withdraw the returned capital and spend it.

By having different gilts mature at set points, rather than owning just one longer-dated gilt, investors can mitigate one of the key risks – interest-rate risk.

This is when gilt values fluctuate linked to market conditions – rising interest rates are bad news for bond prices and falling rates are good news, generally speaking. The longer the gilt and the lower the coupon, the higher the “duration” or interest rate sensitivity is.

Another risk that a ladder can help mitigate is reinvestment risk. This is the risk that yields have fallen when the time comes to reinvest.

By owning just a single long bond, all your capital is returned at one point. If interest rates have dropped substantially when the gilt matures, then the risk is that you lock in a lower yield.

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However, with a gilt ladder, you are only ever reinvesting a portion of your portfolio when a gilt matures, this means you are less likely to have to invest everything at an unfavourable time, and you average out reinvestment risk by adding more money to the market gradually.

A gilt ladder also provides more frequent coupons due to owning more than one bond. Because gilts pay two coupons a year, a portfolio of 10 gilts would mean 20 annual income payments, compared with just two for one bond. 

≈, says there is no uniform answer on how to build a gilt ladder, as it depends on the goals and circumstances of the individual. These goals may be retirement planning, or paying school fees, he notes.

He also says that the profile of the gilts you buy can make a big difference for tax purposes. While coupons are taxed as income, the difference between the purchase price of a gilt and the £100 redemption value is capital gains tax free.

“If you buy them near their par value, you are getting your yield as coupons. If you buy below par, then you get some of the return from the return of the bond’s principal on maturity,” Becket said.

He says that the near-guarantee return from the UK government, if achieved though low-coupon discounted gilts, would be the equivalent of around 7% return from other assets, held outside a SIPP or ISA, as a result of income tax.

“This means that gilts are not just the domain of investors looking for retirement, they can be a good investment option for many types of investors,” Becket said.

How to put together a gilt ladder

Tom Hibbert, multi-asset strategist at Canaccord Genuity, provides two worked examples of how he would build a gilt ladder for a client.

The first is someone retiring at 65, with £500,000 in a SIPP looking to use gilts to fund 25 years of retirement.

Hibbert says: “This portfolio provides the investor with real (adjusted for 2.5% inflation) annual income of £26,500 paid through coupons and the face value of the gilts at maturity. For a real client, more gilts might be preferable to increase the regularity of lump-sum payments at maturity dates. For the sake of simplicity, in this example I have built a ladder using 14 gilts for a 25 year period.”

Source: Canaccord Genuity, 15 January 2025. Past performance is not a guide to future performance.

The second case study is someone in their 40s, looking to plan 10 years of private school expenses for two children.

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Hibbert says: “The elder child has four years remaining of primary school, starting at £17,000 per annum and increasing at 2.5% a year, before starting secondary school for five years at £55,600 a year, finishing one year before the period ends.

“The younger child has five years remaining of primary school starting at £17,000 per annum and increasing at 2.5% a year before starting secondary school for five years at £57,000 a year, finishing at the period end in 10 years.”

Source: Canaccord Genuity, 15 January 2025. Past performance is not a guide to future performance.

Hibbert adds: “In this portfolio, I have prioritised low-coupon gilts for tax efficiency, although I have not embedded capital gains tax into my calculation, which would likely have to be taken into account explicitly.

“Note that the biggest investments are in the longer-dated gilts as secondary school fees are more expensive and as prices rise due to inflation. Additionally, coupons in the longer-maturity gilts contribute to earlier years’ fees, so although this portfolio uses low-coupon gilts it does mean marginally less needs to be invested in shorter-dated gilts.”

Hibbert says this would require an initial investment of £583,500 today in the following gilts.

Investors can find a list of gilts available on ii here: https://www.ii.co.uk/bonds

The UK’s Debt Management Officer also has a list of gilts in issue here: https://www.dmo.gov.uk/data/gilt-market/gilts-in-issue/

And the London Stock Exchange’s website is a useful tool to find out when a gilt pays its coupons and matures.