How to Buy Bonds in the UK: A Complete Guide
We break down the types of bonds, associated risks and returns, and how to purchase them, so you can invest confidently.
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Finding ways to make your money work harder for you is key to building financial security. But this is easier said than done. While regular savings accounts offer low interest rates, the stock market can deliver greater returns, but with more risk.
Whether you’re a cautious investor gunning for lower risk or a seasoned investor looking to diversify your portfolio, bonds are a great solution. They usually provide predictable income, less volatility, and strong capital protection.
That said, the world of bonds can be confusing, especially if you’re new to it. In this guide, we’ll walk you through everything you need to know about bonds in the UK, including how they work, the different types available, how to buy bonds, and the main risks to be aware of.
Key takeaways
- Bonds are loans you make to governments or companies in exchange for regular interest payments and the repayment of your principal at maturity.
- The 2 main types of bonds in the UK are government bonds (low risk, lower return) and corporate bonds (higher risk, higher return).
- Depending on the type, you can buy bonds via the UK Debt Management Office, banks, brokers, or investment platforms.
- Bonds are generally less volatile than equities but carry risk—for instance, interest rate, inflation, credit, liquidity, and call risks.
What are bonds?
Bonds are a type of fixed-income investment where you lend money to a government or corporation in exchange for regular interest payments and the return of your original investment at a future date. These investments are typically less risky and volatile than stocks, making them a popular choice for investors who want a more stable and predictable income stream.
How do bonds work?
Here’s how bonds work.
- You lend a set amount (face or par value) to the issuer, like the government or a corporation; this is the amount they’ll repay at maturity (the end of the bond’s term).
- The bond runs for a fixed term, such as 1 year (short-term), 5 to 10 years (medium-term), or 10 years or more (long-term).
- During this time, you earn interest, known as the coupon, which is a percentage of the face value and is paid annually or semiannually. For example, a 5% coupon on a £1,000 bond pays £50 per year.
- At maturity, the issuer repays the full face value.
While you can sell bonds before maturity on the secondary market, the price may be higher or lower than your purchase price depending on current interest rates, the issuer's credit score, and other factors.
Types of bonds
In the UK, there are 2 main types of bonds available to investors: government bonds and corporate bonds.
Government bonds
Government bonds—often known as gilts—are loans that the national government takes out to fund public spending. They’re generally lower-risk because they’re backed by the UK government, which has an unblemished record of meeting its debt obligations.
Within this category, you’ll find several types:
- Fixed-rate gilts pay a fixed coupon (interest) payment every 6 months and are the most common type of UK government bond.
- Index-linked gilts adjust interest and the final repayment amount to account for inflation, helping to preserve the real value of your investment over time.
- Treasury bills (T-bills) are short-term bonds that usually mature between 1 and 12 months. While there are no interest payments, you purchase these at a discount and receive the full face value at maturity so you can make a profit.
Corporate bonds
Corporate bonds are debt securities issued by businesses to raise capital for various purposes, such as funding current operations, financing new projects, or even refinancing existing debt. Corporate bonds tend to offer higher returns than government bonds.
Here are the main types:
- Fixed-rate corporate bonds pay a consistent interest rate at regular intervals, often semi-annually, and are the most common form of corporate debt.
- Floating-rate notes (FRNS) offer interest payments that fluctuate based on a benchmark rate, such as the Sterling Overnight Index Average (SONIA)—an advantage when interest rates are rising.
- Zero-coupon bonds don’t pay interest but are bought at a discount, and you receive the full face value upon maturity.
- Convertible bonds can be converted to the issuer’s stock at a future date, giving you equity-like gains with the relative safety of a bond.
How to buy bonds
Government bonds
You can buy these from the UK Debt Management Office (DMO)’s website during specific gilt auctions or through the secondary market using brokers, banks, or the DMO's Purchase and Sale service.
These are available for purchase through stockbrokers and investment platforms like AJ Bell, Hargreaves Lansdown, or Interactive Investor, although a brokerage fee may apply. You can also directly buy bonds listed on the London Stock Exchange’s Order Book for Retail Bonds (ORB) either online or over the phone.
Other ways to invest
You can invest in bonds indirectly through actively managed bond investment funds, which hold a diversified portfolio of bonds or passive options like bond ETFs (exchange-traded funds). Online brokers and investment platforms usually offer these types of indirect investments.
What risks are involved in bond investing?
Here are the key risks to be aware of when investing in bonds:
- Interest rate risk: When market interest rates increase, your existing bonds with lower fixed rates become less valuable, causing their market price to fall. If you sell your bond before maturity, you might incur a loss.
- Inflation risk: If inflation (or the cost of living) increases significantly, the real value of your fixed interest payments might drop, shrinking your purchasing power.
- Credit (default) risk: This is the risk that the issuer will be unable to repay the interest, the principal, or both. You can assess a bond’s credit risk by checking the credit rating issued by agencies like Moody’s, Standard & Poor’s (S&P), or Fitch. For instance, S&P’s AA rating is typically for high-grade bonds, while a BB rating is more commonly associated with junk bonds.
- Liquidity risk: It’s harder to sell some bonds (e.g., riskier corporate bonds) quickly at a fair price if you need to access your funds before maturity.
- Call risk: If interest rates drop, some issuers have the right to repay a “callable” bond before it matures. You lose access to higher rates and may need to reinvest your money at a lower rate.
What returns can I expect from bond investing?
For gilts, returns are usually modest, ranging from 2% to 5% annually, depending on the term of the bond and market conditions. Longer-term gilts may offer slightly higher returns, but they are also more sensitive to interest rate changes.
Corporate bonds offer higher returns due to the increased risk. Investment-grade corporate bonds typically yield around 3% to 6%, while higher-risk, high-yield bonds, often referred to as junk bonds, can offer yields of 6% to 10% or more.
FAQs
Are the returns from bonds taxable in the UK?
Generally, the interest you receive from bonds is taxable as income tax and counts towards your personal savings allowance. However, there are tax-efficient ways to invest in bonds, such as through an ISA wrapper (like a stocks and shares ISA), where both interest payments and capital gains are tax-free.
What are fixed-rate bonds?
Fixed-rate savings bonds are savings accounts where you agree to lock your money away for a predetermined term, such as a 1-year fixed-rate bond or a 2-year fixed-rate bond, in exchange for a higher interest rate than you would typically receive in a regular savings account or interest-paying current account. Unlike an ISA, your returns can be
What are British Savings Bonds?
British Savings Bonds are fixed-term savings products offered by National Savings and Investments (NS&I), which is backed by the UK government. Like fixed-rate savings bonds from banks and building societies, they require you to lock away your money for a set period in exchange for a fixed rate of interest.
Are bonds a good way to save for retirement?
While bonds can offer a steady income stream for retirement, it’s also worth investing in fixed-rate ISAs, stocks and shares ISAs, or lifetime ISAs (if you’re eligible). These provide tax-free returns and potentially better rates for those in their 60s and later.