Government Bonds: A debt that will pay

WHAT ARE THEY?

A gilt is just a different name for a government bond. These are effectively an IOU issued by the Treasury, bought by investors.

HOW DO THEY WORK?

The buyer hands over some money to the Government.This is used to run the country. As a thank you, the Treasury pays regular interest, called a coupon. The whole loan is returned in full at the end of the bond’s term.

But, just like ordinary shares, they can be bought and sold - meaning their price can go up and down. The trouble is, the more you pay, the less you get in interest.

SO WHO INVESTS?

Big banks, pension funds and millions of ordinary savers through investment companies. Many of the bond funds held in stocks and shares Isas contain gilts.

They are popular because you are virtually guaranteed of getting your money back and a steady income - unless, that is, the UK Government goes bust.

However, this relative safety means payouts are smaller than on riskier company bonds.

ARE THERE gilts in my pension?

Savers in stock market-linked company pensions typically have their money moved into gilts near retirement. This is called ‘lifestyling’ and is designed to protect the pot from share-price wobbles.

But gilts are also used to set pension-payout rates on annuities, which turn a pot into retirement income. Higher prices make it more expensive to buy a set income. So retirees are getting less for each pound in their pots.

Is this price boom bad?

The crisis in Europe has helped to make UK bonds more attractive, as has the Bank of England buying huge numbers in its so-called quantitative easing policy. Experts say gilts are in a bubble; when it pops, some suggest as much as 30 pc could be wiped off their value.

This could spell particularly bad news for anyone who has been moved into bonds by their pension provider right at the top of the market. On the flipside, pension payouts could rise.