How to Build a Gilt Ladder for Steady Income

An illustrative ladder

Here is a ten-rung ladder built from conventional gilts, one maturing roughly each year from 2027 to 2035. Prices and yields are from the data.

• UK Treasury 4.125% 2027, price 100.02, YTM 4.08%
• UK Treasury 4.25% 2027, price 99.93, YTM 4.3%
• UK Treasury 4.375% 2028, price 99.96, YTM 4.4%
• UK Treasury 4.000% 2029, price 98.69, YTM 4.56%
• UK Treasury 4.375% 2030, price 99.42, YTM 4.56%
• UK Treasury 4.125% 2031, price 98.03, YTM 4.61%
• UK Treasury 4.25% 2032, price 97.88, YTM 4.66%
• UK Treasury 3.25% 2033, price 91.6, YTM 4.77%
• UK Treasury 4.250% 2034, price 95.58, YTM 4.93%
• UK Treasury 4.5% 2035, price 96.58, YTM 5%

Notice the pattern. The shorter rungs yield less, and the yield climbs as you go further out. The 2027 rung offers 4.08%, while the 2035 rung offers 5%. That upward slope means longer rungs pay you more today, in exchange for tying up your money for longer.

Split your money evenly across the ten and you spread your exposure across a range of maturities. As each rung matures, you decide whether to spend the cash or add a fresh long rung, say a 2036 or 2037 gilt, to keep the ladder rolling.

Tuning the ladder to your needs

The example uses gilts near par, meaning prices close to 100. Some investors prefer these because most of the return arrives as coupon rather than capital gain.

Low-coupon gilts work differently. The UK Treasury 3.25% 2033 trades at 91.6, so more of its return comes from the climb back to 100 by maturity. That capital gain is free of UK capital gains tax on gilts, which some higher-rate taxpayers find useful. The coupon, though, is still taxable in a normal account. A stocks and shares ISA or a SIPP shelters both.

Want inflation protection? Index-linked gilts adjust their payments in line with prices. They behave differently from conventional gilts, and some of the ones in the data show unusual quoted yields, so read the details carefully before buying. For a first ladder, conventional gilts are simpler.

Risks to keep in mind

A ladder reduces some risks but not all.

Interest rate risk affects you if you sell early. Gilt prices fall when rates rise. Hold to maturity and you sidestep this, because you get the face value back regardless of the price in between. Sell before maturity and you take whatever the market offers that day.

Inflation risk eats into fixed coupons. A 4.5% yield feels generous when inflation is low and thin when inflation is high. Conventional gilts do not adjust for this.

Reinvestment risk shows up when a rung matures. Rates may be lower then, so your new rung might yield less than the one it replaces.

Yields also change constantly. The numbers above are a snapshot, and the actual gilts available and their prices will differ by the time you buy.

Getting started

Most UK investment platforms let you buy gilts directly, though the range and dealing costs vary. Check that your chosen platform stocks the specific gilts you want. Decide how much cash you want returning each year, then size each rung to match. Keep it simple at first, and add rungs as you get comfortable.

A ladder rewards patience more than cleverness. Buy sensible gilts, hold them, and let the maturities do the work.

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This article is for general information only and is not personal financial advice. Bond prices and yields change, and the figures here are a snapshot. Your capital is at risk if you sell before maturity, and returns are not guaranteed. Consider your own circumstances and speak to a regulated financial adviser if you are unsure.