Index-Linked Gilts Explained — How UK Inflation-Protected Government Bonds Work
With UK long-term gilt yields at 4.45% and inflation remaining a persistent concern for British investors, index-linked gilts offer something conventional bonds cannot: a government-backed guarantee that your returns will keep pace with rising prices. These inflation-protected securities adjust both their principal and interest payments in line with the Retail Prices Index (RPI), providing a real return regardless of what happens to the cost of living. Index-linked gilts make up roughly a quarter of the UK government's outstanding debt, yet many investors — particularly those more familiar with US Treasury Inflation-Protected Securities (TIPS) — find their mechanics confusing. Understanding how they work, what they actually pay, and when they make sense in a portfolio is essential for any fixed-income investor navigating the current rate environment.