Short explanation of bonds and gilts and are they the same

13th November 2025

Scottish Government is preparing to enter the mysterious world of the bond market. So a simple explanation of what they are.

Bonds are debt instruments issued by governments, companies, or other entities to raise money. When you buy a bond, you're lending money in exchange for regular interest payments and eventual repayment of the principal.

Gilts are a specific type of bond — they're UK government bonds. The term "gilt" comes from the original certificates having gilded edges.

So yes — gilts are a type of bond, but not all bonds are gilts.

Gilts can strengthen pensions and reduce tax on savings, but rising yields also signal economic stress. They're a double-edged sword for households and retirees.

Here's how gilts affect savings and pensions in practical terms:

Impact on Pensions
Defined Benefit (DB) Schemes: When gilt yields rise, the cost of future pension liabilities falls. This improves the funding position of DB schemes, making them more secure for members.

Investment Strategy: Pension funds often hold gilts to match liabilities. Rising yields can boost returns, but sudden spikes (like in 2022) can trigger collateral calls and liquidity stress.

LDI (Liability-Driven Investment): Many UK pension schemes use LDI strategies involving gilts. Sharp yield movements can destabilize these setups if not properly hedged.

Impact on Savings
Tax Efficiency: Certain gilts (like index-linked or zero-coupon gilts) can help savers reduce tax on interest income, especially if they've maxed out their ISA allowance.

Alternative to Savings Accounts: With rising gilt yields, some gilts now offer better returns than traditional savings accounts, especially for higher-rate taxpayers.

Market Volatility: Gilt prices fluctuate with interest rates and inflation expectations. While they're low-risk compared to equities, they're not risk-free.

Real-World Example
In early 2025, UK 10-year gilt yields hit 4.9% — the highest since 2008. This helped pension schemes reduce liabilities but also raised government borrowing costs, pressuring public finances and potentially affecting future tax and spending decisions.

Gilt Suitability Checklist
1. Do you pay income tax on savings interest?

If yes, gilts may offer tax advantages, especially if held in ISAs or if using tax-efficient gilt types like zero-coupon or index-linked gilts.

2. Are you looking for low-risk, long-term savings?

Gilts are backed by the UK government and considered low-risk.

Ideal for capital preservation and predictable income.

3. Do you want to beat inflation?

Consider index-linked gilts, which adjust payouts based on inflation.

Useful for protecting purchasing power, especially in high-inflation periods.

4. Are you nearing retirement or managing a pension pot?

Gilts can help stabilize pension investments and reduce volatility.

Rising yields may improve annuity rates and pension scheme funding.

5. Do you need access to your money quickly?

Gilts can be sold before maturity, but prices fluctuate.

Not ideal for short-term liquidity unless held in flexible platforms.

6. Are you comfortable with basic investment platforms?

Gilts are available via brokers, investment platforms, and some banks.

You'll need to understand terms like "yield," "coupon," and "duration."

Bonus Tip for Small Shops
If you’re holding excess cash in a business account earning little interest, short-dated gilts could offer better returns with low risk, especially if you’re not planning to spend that cash for 6-12 months.

Yield
Definition: The annual return you earn from a bond, expressed as a percentage of its current price.

Types:

Current yield: Annual coupon divided by market price.

Yield to maturity (YTM): Total return if held to maturity, accounting for price changes.

Example: If a bond pays £50 annually and costs £1,000, the current yield is 5%.

Coupon
Definition: The fixed interest payment a bondholder receives, usually annually or semi-annually.

Set at issuance: Based on prevailing interest rates.

Example: A bond with a 4% coupon pays £40 per year on a £1,000 face value.

Duration
Definition: A measure of a bond’s sensitivity to interest rate changes.

Higher duration = more risk: If interest rates rise, bond prices fall — and longer-duration bonds fall more.

Types:

Macaulay duration: Weighted average time to receive cash flows.

Modified duration: Estimates price change for a 1% interest rate shift.

Example: A bond with a duration of 7 years will drop roughly 7% in price if rates rise by 1%.

These terms are especially useful when comparing gilts to savings accounts or planning pension investments.