What is a gilt ladder? A guide for UK retirement income

A gilt ladder is a set of UK government bonds chosen so that one matures each year, with each maturity sized to cover that year’s spending. It turns part of a portfolio into a schedule of known payments, which is why it is popular with people approaching or in retirement.

Gilts in one paragraph

A gilt is a loan to the UK government. A conventional gilt pays a fixed coupon, normally twice a year, and repays its face value on a set maturity date. If you buy a gilt and hold it to maturity, the cash you will receive is known in advance, whatever happens to its market price along the way.

How the ladder is built

• Decide how many years of spending you want to secure, for example the first ten years of retirement.
• Work out the income you need from the ladder each year, after other sources such as the State Pension or a defined benefit pension.
• Buy a gilt maturing in each of those years, sized so that the maturing amount plus coupons from the longer rungs covers that year’s need.
• Each year a rung matures and pays out. You spend it, and can choose to extend the ladder by buying a new longest rung.

Why people use one

• Certainty: held to maturity, the nominal cash flows are fixed and backed by the UK government.
• Protection from bad timing: because near-term spending is already funded, you are not forced to sell shares after a market fall.
• Flexibility: unlike an annuity, you keep the capital. You can sell gilts early, though the price you get will depend on interest rates at the time.
• Tax treatment: gains on gilts are exempt from capital gains tax for UK individuals, while coupon income is taxable outside an ISA or pension. Tax rules can change and depend on your circumstances.

The trade-offs

• Inflation: a conventional gilt pays fixed pounds, so rising prices erode what each rung buys. Index-linked gilts address this, at a different price.
• It ends: a ladder covers a fixed number of years. An annuity pays for life. Longevity beyond the ladder has to be funded some other way.
• Opportunity cost: money in the ladder is not invested for growth. Most plans pair a ladder for near-term spending with a growth portfolio for later decades.
• Price movement: if you sell before maturity, you may get back less than you paid.

How much to put in the ladder

There is no single right answer. A longer ladder buys more certainty and leaves less invested for growth. A useful approach is to cover the spending you could not comfortably cut, for the years when a market fall would hurt most, and test the combined plan against a range of market outcomes.

This article is general information, not financial advice or a recommendation to buy any investment.