There is a wide range of maturity dates available, and many gilts carry only a very small dividend, so you are almost buying a tax-free spot payment at a specific future date.
One option from a retirement planning perspective is to buy gilts that will mature at your projected retirement age. So, if you are 45, you could buy a very long dated 20-year government bond.
Alternatively, if you want this holding to be inherited, then you could decide to hold them much longer, perhaps for 50 years. Unlike savings held in bank and building society accounts, they will not be exposed to falling interest rates in the coming years.
And provided they are held to maturity, the yield they will deliver is fixed. Furthermore, if inflation is a concern for clients then inflation-linked and fixed interest gilts can be purchased.
The investor who buys gilts will pay the market price on the day of purchase. We know that the price will move to 100 (called ‘par’) by its maturity date. But the progression of that price can be anything but smooth. This may provide an opportunity to take profits along the way if the price rises above par.
The price can also go down and should the investor need money back before the maturity date then those losses would have to be crystallised – hence the importance of checking that the cash flows from gilts will meet investors projected needs.
Above all, gilts can be viewed as risk free. Whereas the issuers of corporate bonds can and do default.
However, gilts that were first issued back in 1694, now have a 330-year unbroken track record of the British government never failing to make interest or principal payments on gilts as they fell due.
As such, they may offer a useful counterbalance to higher risk investments within a balanced portfolio.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
