Two rules for those seeking to allocate some of their retirement savings into UK gilts

16 Apr 2025

S&P 500 index

The S&P 500 index is widely respected as the best single gauge index of US large cap stocks. Many investors will have at least part of their pension funds invested in S&P 500 index tracker funds, or in actively managed US funds that see the S&P 500 as a yardstick they seek to outperform a bit, without straying too far from its basic make up.

Historically it has paid its investors handsomely, and if you had put your money into an S&P 500 tracker fund five years ago then you would have earned 17% a year, with your fund doubling over that time.

Except that this year has been different, driven by a roller coaster news flow from the White House in Washington, where the 47th US President Donald Trump is behaving like a man in a hurry, often with maverick entrepreneur Elon Musk at his side.

While writing the S&P 500 was down 10% since the President's inauguration in January, with the index falling over 3% at the open as markets reacted to the scale of the "reciprocal" tariffs announced on what the President dubbed as "liberation day". Perhaps US investors were more worried about the inflation that might follow the imposition of typically 20% tariffs on top of the previous price of imported goods than they were excited about the prospect of trade protectionism creating more jobs for American home-producing businesses.

Gilts and corporate bonds

In complete contrast, a classic pension bond investment, like the 15-year UK gilt Treasury 4.25% 2040, sat calmly on the water with its price virtually unchanged since the start of the year. It even edged higher, by just a smidgen, on that aforementioned tariff announcement.

This is precisely why pension investors like to balance having some of their money in exciting equities with some of it in staid and predictable gilts. The US Presidential shenanigans are a reminder also of the difference between gilts and corporate bonds. The former are guaranteed by the British government, whilst the latter, which will yield a tad more interest, are issued by individual companies. On "liberation day" some corporate bonds went up whilst others went down, as eagle-eyed investors were digesting the likely impact of the tariffs on individual companies.

The tariff chaos continued before I had submitted this piece, with Trump pausing additional tariffs on countries willing to negotiate with the US.

The yield on 30-year gilts had risen to their highest level since the 1990s before falling back. But China has hit back at the US and the markets continue to be a rollercoaster ride.

Allocating retirement savings into UK gilts

There are two useful rules for those seeking to allocate some of their retirement savings into UK gilts:

• Choose a duration that fits your personal circumstances. The Treasury's Debt Management Office has issued a wide range of gilts with maturity dates extending up to 2073. If investors choose a selection of maturity dates around the sort of time when they will want to access their money, gilts really can be a buy and forget investment. Of course, it is a liquid market and they can always be sold earlier, but at an uncertain price. When held to maturity the final price and the long-term return the investment will have yielded are precisely known.
• Gilts fall broadly into two types. Those that pay a rate of interest similar to cash – broadly 4.5% per year and those that pay much less interest but make up the rest of the return through capital appreciation. Choose the one appropriate for the wrapper you are holding it in. Self-invested personal pensions and ISAs don't pay income tax on that interest, whilst direct holdings in a general investment account will. Meanwhile, the capital gain on gilts held directly is exempt from capital gains tax, so it may be attractive to choose the low coupon stocks when holding them outside of a tax wrapper.

Many pension savers have been waking up to the attraction of gilts since that infamous Liz Truss Mini-Budget of 23 September 2022. Up until Truss, the UK gilts market had been distorted and depressed by final salary pension schemes wanting to hold vast quantities of gilts, at almost any price, believing that this best hedged their liabilities.

Many caught a cold as their derivative-based strategies came unhinged in the post-Mini-Budget market fallout, and what that has left us with is a much more open gilts market, offering individual savers a decent return for lending their money long-term to the British government.

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