Short answer: an index-linked gilt is a loan to the UK government whose coupons and repayment are scaled up by inflation, so what it promises is buying power rather than pounds. Its return is quoted as a real yield — the return above inflation — and the gap between that and a conventional gilt's yield is the breakeven inflation the market is pricing. Held to maturity, a linker does exactly what it says. The money is lost in between — 2022 took roughly half off the long ones — or by paying for inflation protection that was not needed. Here is each way, in pounds.
How the indexation works
Every index-linked gilt carries a base RPI figure from when it was issued. Each payment is multiplied by the ratio of the RPI now to that base — the index ratio. A linker issued when RPI stood at 200, paying out when it stands at 340, has an index ratio of 1.70: the £100 repayment becomes £170, and a ½% coupon (50p per £100 a year) becomes 85p. The ratio uses RPI from three months earlier on gilts issued since 2005 (eight months earlier on the older ones), so the last few months before any payment are already known.
Two consequences follow. First, the price you see on a platform is the real price — per £100 of buying power — multiplied by that ratio, which is why a linker can be quoted at £160 or £250 without being "expensive". Second, because the uplift is applied to the capital, it is treated as a capital gain and is free of capital gains tax like any gilt; only the coupon, uplift included, is taxed as income.
Real yield, nominal yield and breakeven
A conventional gilt yielding 5% pays 5% in pounds whatever prices do. A linker with a real yield of 1.5% pays 1.5% plus whatever inflation turns out to be: about 4.5% if inflation runs at 3%, about 9.5% if it runs at 8%, and 1.5% if prices stand still. The breakeven is the inflation rate at which the two come out level — (1 + nominal) ÷ (1 + real) − 1 — and it is a price, not a forecast: it includes whatever premium buyers will pay for the insurance. Above the breakeven the linker holder wins; below it the conventional holder does.
| Ten years out, today | |
|---|---|
| Real yield (index-linked gilts) | 2.03% |
| Nominal yield (conventional gilts) | 5.35% |
| Breakeven inflation, RPI (the market's price for the difference) | 3.40% |
| The nearest actual pair: 0 1/8% Index-linked Treasury Gilt 2036 at 2.03% real against 4 5/8% Green Gilt 2037 at 5.39% | 3.35% |
| Three index-linked gilts today | Matures | Real yield | Modified duration | Fall per £10,000 if real yields rise 1 point |
|---|---|---|---|---|
| Short: 0 1/8% Index-linked Treasury Gilt 2029 | 2029-03 | 0.63% | 2.4 | £242 |
| Ten-year: 0 1/8% Index-linked Treasury Gilt 2036 | 2036-11 | 2.03% | 9.9 | £993 |
| Long: 0¼% Index-linked Treasury Gilt 2052 | 2052-03 | 2.57% | 24.0 | £2,399 |
The six ways an index-linked gilt loses money
1. Real yields rise. A linker's price moves with real yields exactly as a conventional gilt's moves with nominal yields, and long linkers have very long durations because their coupons are tiny and their payments back-loaded. In 2022 the Bank of England's ten-year real spot rate went from −2.89% on 31 December 2021 to +0.20% on 31 October 2022 (twenty-year: −2.49% to +0.34%; thirty-year: −2.25% to +0.30%) — a rise of just over three points in ten months (source: Bank of England, GLC Real month end data, spot curve). Inflation was running at over 10% at the time and it did not matter: the price falls swamped a year's uplift many times over.
Put today's numbers on it: 0¼% Index-linked Treasury Gilt 2052 has a modified duration of 24.0 at present. The same 3.09-point rise in real yields would take roughly 74% off its price by the straight-line duration rule; that overstates a move this large (convexity), and repricing its final payment exactly from −2.89% to +0.20% real over 25 years gives a fall of about 55% — some £5,492 of every £10,000. The short one, 0 1/8% Index-linked Treasury Gilt 2029, with a duration of 2.4, would have lost about £749 per £10,000 on the same move.
2. Buying above par at a negative real yield. Between 2010 and 2021 most linkers were priced above £100 real, because their real yields were negative — you paid, say, £125 of buying power to get £100 of buying power back at maturity plus a small coupon. Held to maturity that is a guaranteed real loss: 20% of the capital, softened only by the coupons. The nominal figure on the statement still rose with inflation, which is how a certain loss of buying power passed for a safe investment.
It still happens today on the high-coupon old issues: 4 1/8% Index-linked Treasury Stock 2030 is priced at about £111.55 per £100 of real nominal on the curve of 13 Oct 2026, because its 4.125% real coupon is far above today's real yields. Hold it to 2030-07 and the £100 real you get back is 10% less buying power than you paid — the coupons make up the difference and a little more, which is why its real yield is still 0.99%, but the capital itself is a known real loss of about £1,035 per £10,000.
3. Inflation undershoots the breakeven. Buy a linker when the breakeven is 3.3% and inflation then averages 2%, and you have paid 1.3 points a year for insurance you did not use — the conventional gilt would have paid more. No capital is lost in the ordinary sense; you simply end up with less than the alternative.
With today's pair — 0 1/8% Index-linked Treasury Gilt 2036 at 2.03% real against 4 5/8% Green Gilt 2037 at 5.39% — the breakeven is 3.35%. If RPI inflation averages 2% instead over the next 10 years, £10,000 in the index-linked gilt grows to about £14,922 and £10,000 in the conventional to about £17,013: the linker holder is £2,091 worse off for having bought insurance against inflation that did not come (before tax; the calculator runs your own guess and tax rate).
4. The switch from RPI to CPIH in February 2030. The UK Statistics Authority is aligning the RPI with CPIH from February 2030, with no compensation to holders. CPIH has run about 0.8–1.0 points a year below RPI over the long run (the "formula effect" and housing-cost differences; the UKSA and HM Treasury consultation response of November 2020 put the gap at about one point). For a linker maturing in 2050, twenty years of uplift at one point less compound to about 18% less buying power on the capital — some £1,800 per £10,000 — than the RPI it was bought against. The market priced most of this in when the decision was announced; anyone who bought a long linker before then took the loss on the day.
5. No deflation floor. A US TIPS repays at least its original face value even if prices have fallen. A UK linker does not — under either design, old or new. If RPI is lower at maturity than at issue, the repayment is below £100 per £100 nominal; buy at an index ratio of 1.05 and see the index fall 5% and you get back about £95 of every £100 nominal, plus reduced coupons. On the pre-2005 issues the eight-month lag adds a second quirk: the last eight months of inflation before maturity are never paid at all. Rare in practice — RPI has fallen year on year only briefly since 1960, for a few months of 2009 — but it is the reason a short linker is not quite a certain real return.
6. Tax on the coupons outside a wrapper. Only the coupon is taxed, but the coupon is the uplifted coupon. A 2½% real coupon on a gilt with an index ratio of 2.1 pays £5.25 a year per £100 nominal — on a holding costing roughly £210 — and a 40% taxpayer loses £2.10 of it, about a point off the return. The ⅛% linkers issued since 2020 pay so little coupon that tax barely touches them: their return is almost entirely the uplift on the capital, which is exempt. Inside an ISA or SIPP none of this applies. Every gilt shows each linker's real yield after tax at 20, 40 and 45%.
When a short linker does what people expect — and when a long one doesn't
A short linker — two or three years to run — held to maturity behaves exactly as advertised: you get your buying power back plus the real yield you bought at, the price path in between is small and irrelevant, and the only surprises are the ones above (a falling index, or the 2030 switch if it straddles that date). It is the nearest thing to an inflation-proof deposit that exists, and a ladder of them is a real-terms version of the gilt ladder.
A long linker — twenty or thirty years — is a different animal even though it is the same instrument. Its real duration of twenty-plus means a one-point move in real yields is a fifth of its value, so over any horizon shorter than its own maturity the price swing dwarfs the real yield: you are trading real interest rates, not buying inflation protection. It delivers what people expect only if held to the 2040s or 2050s, through whatever the statement says in between. A fund of linkers is the long case with no maturity at all — the average duration of the UK index-linked market is among the longest in the world, which is precisely why index-linked gilt funds lost a large slice of their value in 2022 while inflation was at a forty-year high, to the surprise of many who held them as a safe asset — the duration arithmetic above is the whole explanation.
The conventional or index-linked? calculator takes your holding period, your own inflation guess and your tax rate, picks the two gilts nearest that maturity from the daily table, and says which pays more per £10,000 — with the crossover inflation where they are equal.
Questions people ask
Are index-linked gilts a safe investment? Held to maturity, a short one is about as safe as a real-terms promise gets. Held for less than its life, a long one is one of the most volatile government bonds there is: on the duration arithmetic above, the 2022 rise in real yields took roughly half off the long end while inflation was at 10%.
Why did index-linked gilts fall in 2022 when inflation was so high? Because their prices follow real yields, and real yields rose by about three points in ten months (Bank of England data above). A long linker's duration of twenty-plus turns three points into a fall of half or more; a year's inflation uplift of 10% could not offset it.
What is the index ratio on my platform's screen? RPI now divided by the gilt's base RPI. Multiply the real price per £100 by it to get the cash price. The daily gilt table computes cash prices this way from the DMO's register.
Will the 2030 change to CPIH cost me money? If you hold a linker maturing after February 2030, its uplift from then follows CPIH, which has run about a point below RPI. The market priced the change in when it was confirmed in 2020; buying today, the lower future uplift is already in the price you pay, but the promised measure is CPIH, not RPI.
Do index-linked gilts have a deflation floor? No — none of them, of either design. That is the main structural difference from US TIPS.
Where do the figures come from? The live figures are the Bank of England's daily real and nominal spot curves and the DMO's register of gilts in issue, recomputed each weekday; the 2022 yields are the Bank's month-end real spot curve archive; the RPI–CPIH gap is from the UKSA and HM Treasury response to the 2020 consultation on RPI reform. The pound examples are duration arithmetic, first-order, with convexity left out and said so.