A gilt ladder is a portfolio of gilts maturing in successive years (e.g. one gilt maturing each year for 5-10 years). At each maturity, the £100 nominal lands as cash — providing predictable retirement spending without selling assets. Index-linked gilts add inflation protection — coupons and principal rise with RPI/CPI. Short-dated low-coupon conventional gilts are the most tax-efficient cash-equivalent for higher-rate retirees outside ISA/SIPP. Sequence-of-returns risk — the danger that early-retirement market declines force you to sell at low prices — is partially mitigated by holding 2-5 years of spending in a gilt ladder.
The gilt ladder concept
A retiree spends from their portfolio over (say) 25 years. Instead of selling stocks/funds each year (vulnerable to bad market years), they build a ladder:
- Year 1 spending: from cash + maturing gilt.
- Year 2 spending: from gilt maturing in year 2.
- Year 3: gilt maturing year 3.
- ...and so on.
Each year, one gilt matures and the £100 nominal becomes cash. If markets are good, you also sell some equity to replenish the longest rung of the ladder. If markets are bad, you defer the equity sale and live off the ladder for another year. This buys time for markets to recover.
Worked example — 5-year gilt ladder for a £30,000/year retiree
£150,000 in gilts (5 years of spending), pension drawdown for the rest
| Rung | Gilt | Maturity | Approx YTM | Nominal £ |
|---|---|---|---|---|
| Year 1 (2026) | Cash / short-dated MMF | Liquid | ~4.4% | £30,000 |
| Year 2 (2027) | TR25 (Treasury 0¼% 2025) | Jan 2025 | ~4.5% | £30,000 |
| Year 3 (2028) | TR26 (Treasury 0⅛% 2026) | Jan 2026 | ~4.4% | £30,000 |
| Year 4 (2029) | TG27 (Treasury 0¼% 2027) | Jan 2027 | ~4.3% | £30,000 |
| Year 5 (2030) | TG28 (Treasury 0⅛% 2028) | Jan 2028 | ~4.3% | £30,000 |
Each January, ~£30,000 lands in the retiree's account from the maturing gilt. They use it for the year's spending. Meanwhile, the equity portfolio continues to grow (or fall — but the retiree isn't forced to sell). At year-end, if equities are up, sell £30k of equity and buy a new 5-year gilt to extend the ladder. If equities are down, the ladder has another 4 rungs — buy time for recovery.
Sequence-of-returns risk — what gilts protect against
The cruelty of sequence-of-returns risk: two retirees with identical 30-year average returns can have completely different outcomes depending on WHEN the bad years happen.
| Retiree | Year 1-5 returns | Year 26-30 returns | Outcome at year 30 |
|---|---|---|---|
| A: bad early, good late | −20%, −15%, +25%, +10%, +5% | +10%, +12%, +8%, +6%, +4% | Portfolio depleted by year 22 |
| B: good early, bad late | +10%, +12%, +8%, +6%, +4% | −20%, −15%, +25%, +10%, +5% | Portfolio still intact at year 30 |
Same average return. Same withdrawal rate. Totally different outcomes. The difference: retiree A was forced to sell equities at lows in years 1-2; retiree B sold equities at highs in years 1-2.
The fix: hold 2-5 years of spending in gilts/cash. During market downturns, draw from the gilt ladder instead of selling equity at lows.
Index-linked gilts (linkers) — inflation protection
For long-horizon retirees worried about inflation, index-linked gilts (linkers) provide real-return protection. The mechanism:
- Both coupon and nominal redemption value are uprated by UK Retail Prices Index (RPI) — transitioning to CPI from 2030.
- If RPI inflation is 4% in a year, the next coupon and the eventual principal both rise 4%.
- Result: you receive a real return regardless of inflation.
Major linkers for retirees:
- UK Treasury 0⅛% Index-Linked 2026 (IL26): short-dated linker.
- UK Treasury 1¼% Index-Linked 2032 (IL32): medium-dated.
- UK Treasury 1¼% Index-Linked 2055 (IL55): very long-dated.
Trade-off: linkers usually have low real yields (e.g. 0.5-1.5% real) compared to nominal gilts (4-5% nominal but exposed to inflation surprise). If you expect inflation above ~3%, linkers tend to win; if you expect lower, nominal gilts win.
The CGT-exempt advantage for retirees
For a retiree drawing from a GIA (general investment account, not wrapped in ISA/SIPP):
- Gilts: capital gains CGT-exempt (Section 115 TCGA 1992).
- Coupons: taxable as savings income (above PSA: 20%/40%/45%).
For a higher-rate retiree with £100k of low-coupon short-dated gilts, the CGT exemption is worth several thousand pounds over the gilt ladder's life vs the same exposure in a non-CGT-exempt investment.
Inside an ISA or SIPP, this advantage doesn't matter — both wrappers are already tax-free. Use gilt ETFs for simplicity inside wrappers; use individual gilts in a GIA for the tax efficiency.
Building a 5-year ladder — practical steps
- Open a brokerage account that offers individual gilts (HL, AJ Bell, II, IBKR).
- Decide your annual spending from the ladder (e.g. £30k/year).
- Buy 5 gilts, each maturing in a different year. Each one funded at ~£30k nominal.
- Look up current yields on the DMO website (dmo.gov.uk).
- Choose short-dated low-coupon issues for maximum tax efficiency outside ISA/SIPP.
- Place 5 trades. Total dealing fees ~£25-£60.
- Each year, when one matures, use it for spending. If markets are up, sell ~£30k of equity and buy a new 5-year gilt to extend the ladder. If down, just spend the cash and defer the equity sale.
Common retirement-gilt mistakes
- Too much in long-dated gilts. "Ballast" goal needs short-to-medium duration. Long-dated gilts can lose 30-40% in a rate spike.
- Ignoring the gilt ladder rebuilding step. If you don't replenish the long end each year, the ladder shortens to nothing and you're back to selling equity in bad years.
- Confusing gilts with gilt ETFs. ETFs don't have a maturity date — they're perpetually duration-matched. Use ETFs for general bond exposure; use individual gilts for ladders.
- Forgetting state pension. State pension is already inflation-linked income — for many retirees, this reduces the need for index-linked gilts.
- Using all linkers. Linkers have lower real yields than nominal gilts have nominal yields. Pure linker portfolios may underperform if inflation surprises low.
Sources and methodology
Sequence-of-returns research draws on Bengen (1994) and subsequent UK-applied research. CGT exemption: section 115 TCGA 1992. Index-linked gilt mechanics from DMO Gilt Market Operational Notice. The methodology page documents sources. For complex retirement income decisions, regulated advice is recommended — see the tax adviser editorial recommendation (regulated pension advice requires an FCA-authorised IFA — different from tax adviser scope).
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