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Bonds: money you lendrisk 2 of 5: low, steady lending

Government bond

Rules, protection and tax below are for United Kingdom.

What it is

A loan to a national government. You hand over the money, the government pays a fixed interest payment on set dates, and at maturity it repays the original sum. Rich-country governments almost never fail to pay, which makes their bonds the reference point for what a very safe return looks like.

The catch is the price in between. A bond can be sold to someone else before maturity, and its price moves in the opposite direction to interest rates: when new bonds pay more, old ones paying less are worth less. Hold to maturity and none of that matters; sell early and it does.

Most countries let ordinary people buy directly from the treasury, cheaply, and the same bonds sit inside many funds and pensions.

How it works

  1. The government issues a bond with a face value, a fixed annual interest rate called the coupon, and a maturity date.
  2. You buy it at issue or from another holder, then receive the coupon on schedule, usually twice a year.
  3. The market price moves daily with interest rates and confidence in the country, so the yield you lock in depends on the price you paid.
  4. At maturity you receive the face value, whatever the price did in between.

The honest pros and cons

For

  • Rich-country government bonds are the closest thing to a promise that exists in investing.
  • You know the income and the repayment date in advance if you hold to maturity.
  • They tend to hold or gain value when shares fall, which steadies a mixed portfolio.
  • Direct purchase from the treasury is usually free or nearly free.

Against

  • Rising interest rates push the price of existing bonds down, sometimes sharply for long maturities.
  • The return is modest and can lag inflation for years.
  • Bonds of weaker governments carry real default risk, and a high yield is the warning sign.
  • Income is usually taxed unless the bond sits in a tax-sheltered account.

Getting it in United Kingdom

UK government gilts available

Gilts are the UK Treasury's bonds, sold at auction and traded in London. Retail investors buy them in small amounts through a stockbroker or platform that lists individual gilts, or hold a gilt fund. Index-linked gilts track the RPI measure of inflation.

  • Account type: Stocks and Shares ISA (gains and dividends inside are tax free)
  • Account type: General Investment Account (an ordinary brokerage account; dividends and gains above the yearly allowances are taxable)
  • Account type: Self-Invested Personal Pension (contributions get tax relief; money is locked until pension age)
  • Your protection: the bond itself is a promise of the UK government; the FSCS covers up to 85,000 pounds per person if the broker holding it fails (source, checked 2026-09-11)
  • Tax here: interest counts as income and uses the Personal Savings Allowance; gains on gilts are exempt from capital gains tax; inside an ISA everything is tax free (source, checked 2026-09-11)

How to start

  1. Pick a maturity that matches when you need the money, so you never have to sell early.
  2. Buy through a broker that lists individual gilts, or use a gilt fund if yours does not.
  3. Compare the yield to maturity with the coupon: a low coupon means most of the return arrives as a tax-free gain outside an ISA.

Wherever you are

  1. Decide the horizon first and pick a maturity that matches it, so you are never forced to sell early.
  2. Compare the treasury's direct-purchase route with a bond fund; direct is cheaper and predictable, a fund is simpler and spreads maturities.
  3. Look at the yield to maturity, not the coupon, because that is what you actually earn at today's price.
  4. Buy, note the payment dates, and leave it alone.

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Go deeper

Also called

gilts, treasuries, Tesouro Direto, JGBs, sovereign bonds

Often confused with

  • Corporate bond: A loan to a company that pays interest; riskier than lending to a government because companies fail more often.
  • Term deposit: Money locked at a bank for a fixed period in exchange for a known interest rate.
  • Bond ETF: An exchange traded fund holding a basket of bonds.
Government bond in United Kingdom · wealth-coop