Are Index-Linked Gilts Worth It Today? A Look at Real Yields

Inflation has a way of quietly eating your savings. One answer the government offers is index linked gilts, bonds whose value and interest payments rise with inflation. On paper that sounds like a safe harbour. The real question is whether they pay enough today to be worth holding over a plain, conventional gilt.

This article works through the live numbers and shows you how to judge the trade-off for yourself.

How index linked gilts actually work

A conventional gilt pays a fixed coupon and a fixed £100 at the end. If inflation surges, the cash you get back buys less. Nothing adjusts.

An index linked gilt is different. Both the coupon and the final payment are scaled up in line with the Retail Prices Index, known as RPI. RPI is an older measure of inflation that tends to run a bit higher than the headline CPI figure you see in the news. From 2030 the way RPI is calculated changes to match a lower measure, which matters for the longer-dated linkers.

Because the inflation part is bolted on separately, the yield quoted on a linker is a real yield. That is the return you earn on top of inflation. A conventional gilt quotes a nominal yield, which includes inflation.

Real yields versus nominal yields

Comparing the two directly is the heart of the matter. Take a pair maturing in the same year.

• UK Treasury 4.75% 2035 yields 5.37% to maturity. That is nominal.
• UK Treasury Index-Linked 1.125% 2035 yields 1.87% to maturity. That is real, above RPI.

The gap between them is roughly 3.5%. That figure is called breakeven inflation, the rate of RPI you would need over the life of the bonds for the linker to end up matching the conventional gilt. If RPI averages more than about 3.5% a year to 2035, the index linked gilt wins. If it averages less, the conventional gilt wins.

So the decision is really a bet on future inflation. Hold a conventional gilt and you lock in a known cash return. Hold a linker and you accept a lower starting yield in exchange for protection if prices run hot.

The short end looks unattractive

At the front of the market, linkers look expensive. Consider the UK Treasury Index-Linked 1.25% 2027. Its real yield to maturity is -0.3%. Negative. You are paying for the privilege of inflation protection, and you are guaranteed to lose a little in real terms if you hold it to the end.

Compare that with the UK Treasury 1.25% 2027, a conventional gilt yielding 4.4% to maturity. The breakeven inflation between them is well above 4%. RPI would have to stay stubbornly high for the linker to pay off over such a short window. For most people chasing short-term income, the conventional gilt is the simpler, higher-paying choice.

Real yields climb as you go longer

Step further out and the picture improves for linkers. Real yields rise steadily with maturity:

• Index-Linked 0.125% 2028: 0.31% real
• Index-Linked 0.125% 2031: 1.18% real
• Index-Linked 1.125% 2035: 1.87% real
• Index-Linked 0.125% 2044: 2.52% real
• Index-Linked 1.875% 2049: 2.51% real

A real yield above 2% is meaningful. It means the bond is promising to beat RPI by more than two percentage points a year, every year, to maturity. For a long-term saver worried about the cost of living decades from now, that is a genuine hedge rather than a gimmick.

Notice the very long linkers, such as the Index-Linked 0.125% 2073 at 1.86% real, offer slightly less. Part of that reflects the RPI reform landing in 2030, which trims the inflation uplift on bonds maturing after that date.

Weighing up the breakeven

Here is a simple way to frame any pair. Look at the nominal yield on a conventional gilt, subtract the real yield on a linker of similar maturity, and you have the inflation rate that makes you indifferent between them.

Around the 10-year area, the UK Treasury 4.75% 2035 at 5.37% against the Index-Linked 1.125% 2035 at 1.87% gives a breakeven near 3.5%. Ask yourself a plain question. Do you think UK inflation, measured by RPI, will average more or less than that over the next decade? If you genuinely fear sustained high inflation, the linker is your friend. If you expect inflation to settle back towards target, the conventional gilt pays you more for the same risk.

Points to keep in mind

• Price swings are real. Long linkers move sharply if real yields change. The Index-Linked 0.125% 2056 trades around 51.33, far below £100. Sell early and you could lose money, protection or not.
• RPI is being reformed. From 2030 the measure aligns with a lower index. That reduces the inflation top-up on bonds maturing afterwards.
• Tax and wrappers matter. Gilt price gains are free of capital gains tax, but coupons are taxable outside an ISA or SIPP. The maths can shift depending on your situation.
• Deflation protection varies. The final redemption of most linkers is floored at par, but interim valuations are not.

So, are they worth it?

It depends on your horizon and your view on inflation. Short-dated linkers currently offer poor or even negative real yields, so a conventional gilt usually makes more sense there. Longer-dated index linked gilts, with real yields above 2%, give a credible hedge for savers who want to protect purchasing power into retirement and beyond. They are a tool for a specific worry, not a free lunch.

Run the breakeven sum on any pair before you buy. Let your own inflation expectation make the call.

Risk disclaimer: This article is for general information only and is not personal financial advice. Bond prices and yields change constantly, and the figures here are a snapshot dated 20 October 2026. The value of gilts can fall as well as rise, and you may get back less than you invested. Returns are not guaranteed. Consider your own circumstances and speak to a regulated financial adviser if you are unsure.

Important disclaimer

This article is for information only and is not financial advice. Gilt prices and yields move daily and your capital is at risk. Always do your own research or speak to a regulated financial adviser before investing.