Index-Linked GILTs: A Complete Guide

Index-Linked GILTs are a unique type of UK government bond that provides protection against inflation. This comprehensive guide explains everything you need to know.

What are Index-Linked GILTs?

Index-Linked GILTs (also called inflation-linked bonds) are UK government bonds where both the principal and coupon payments are adjusted for inflation using the Retail Prices Index (RPI).

How They Work

Principal Adjustment

• The face value increases with RPI
• At maturity, you receive the inflation-adjusted principal
• Protects your purchasing power

Coupon Adjustment

• Coupon rate is fixed (e.g., 0.125%)
• But paid on the inflation-adjusted principal
• Real income grows with inflation

Index Ratio

• Current index ratio = RPI today / RPI at issue
• Applied to both principal and coupons
• Updated daily

Benefits of Index-Linked GILTs

1. Inflation Protection

• Principal keeps pace with inflation
• Real purchasing power maintained
• Ideal for long-term savings

2. Predictable Real Returns

• Know your real (inflation-adjusted) return
• Not affected by unexpected inflation
• Planning becomes easier

3. Diversification

• Different risk profile than conventional GILTs
• Performs well when inflation rises
• Reduces portfolio risk

Drawbacks to Consider

1. Lower Initial Yields

• Real yields typically lower than nominal GILTs
• Trade-off for inflation protection
• May underperform if inflation is low

2. Deflation Risk

• If RPI falls, principal can decrease
• Minimum floor usually protects (100% of original)
• Rare but possible

3. Tax Considerations

• Inflation gains may be taxable
• Consider tax wrapper (ISA, SIPP)
• Consult tax advisor

Who Should Invest?

Index-Linked GILTs are ideal for:

• Retirement Savers: Protecting long-term purchasing power
• Inflation-Worried Investors: Concerned about rising prices
• Long-Term Investors: Time horizon of 10+ years
• Income Seekers: Want inflation-protected income

Calculating Returns

Our calculator handles Index-Linked GILTs automatically:

• Accounts for index ratio
• Calculates real and nominal returns
• Shows inflation-adjusted values
• Compares to conventional GILTs

Market Factors

Index-Linked GILT prices are affected by:

• Inflation Expectations: Higher expectations = higher prices
• Real Interest Rates: Bank of England policy matters
• Supply and Demand: Limited supply can affect pricing
• RPI Changes: Monthly RPI releases move prices

Investment Strategy

Ladder Strategy

• Buy bonds maturing at different dates
• Provides regular inflation-protected income
• Reduces reinvestment risk

Long-Term Hold

• Best for retirement planning
• Maximizes inflation protection
• Minimizes trading costs

Portfolio Allocation

• Consider 20-40% of bond allocation
• Balance with conventional GILTs
• Adjust based on inflation outlook

Tax Efficiency

Individual Savings Account (ISA)

• No tax on coupon income
• No capital gains tax
• Ideal for index-linked GILTs

Self-Invested Personal Pension (SIPP)

• Tax relief on contributions
• Tax-free growth
• Tax-efficient in retirement

Using Our Calculator

Calculate Index-Linked GILT returns:

1. Select an index-linked bond

2. Enter investment amount

3. Set inflation rate assumption

4. View inflation-adjusted returns

5. Compare to conventional GILTs

Conclusion

Index-Linked GILTs offer unique inflation protection that conventional bonds cannot match. While they have lower initial yields, they provide peace of mind for long-term investors concerned about inflation eroding their purchasing power.

Use our calculator to see how Index-Linked GILTs could fit into your portfolio and protect your wealth against inflation.