Blog » Inflation, pensions, and gilts

Inflation, pensions, and gilts

November 27, 2023
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.

Inflation is having a large impact on the UK. It’s clear there is not only a need for budgeting for the here and now, but also a necessity to keep a keen eye on longer term savings, investments, and pensions.

Fortunately, statistics show short-term issues like inflation are likely to get better in the long term, but that doesn’t mean the immediate and long term effects of inflation should be ignored.

In this article we look at how specific investments are affected (explaining gilt yields) and how you can help your retirement savings stay on track.

Global inflation hits new heights

Inflation is causing havoc for consumers throughout the UK.  Not only when paying everyday bills, but also in terms of long-term savings and pension investments.  

The current UK inflation rates (August 2023) are at 6.3% according to the Office for National Statistics (ONS). In an attempt to combat inflation, the government has increased interest rates to encourage a reduction in spending. The hope is a fall in spending will readjust supply and demand issues and prices will fall.

However, the short-term outcome of this method is businesses are likely to struggle (because they cannot afford to borrow). Consequently, employment opportunities fall (there is little investment in new growth) and although consumers may see prices become steadier, they may well also continue to rise.

Long-term investment

The key to high-performance in longer term investments is the knowledge and ability to place savings where they are less likely to be affected by price rises or interest hikes. Generally, pension investments work harder than inflation rates, but they are still liable to the negative consequences of inflation.

Therefore, to a large degree, it is the economic culture which drives how the pension fund manager will choose which sectors will be most beneficial for your pension investments. Consulting with a regulated financial adviser can help to ensure your money is invested in the best place for your specific circumstances.

Where will my money be invested?

If you are someone who finds the world of pensions complex and know little about contemporary financial opportunities, then the help of a regulated financial adviser can be invaluable. If you want more control over where your money is invested, then you could always consider a Self-Invested Personal Pension.

With defined contribution or defined benefit pension schemes, your pension contributions are likely to be invested in shares, cash bonds, property, and company funds. Individuals (often titled asset managers) decide how much of your money will go into each sector. They do this by looking at how each sector is performing now and likely to perform in the future. Risk is managed by perpetually moving money between struggling and successful investments.

For defined contribution schemes, the money in your pension pot depends on contributions and investment performance. Therefore, defined contribution pension schemes are directly affected by inflation. With defined benefit pension schemes, the risk sits with your employer. This is because the income you receive from your direct benefit pension is guaranteed by your employer. So while inflation may affect your direct benefit pension in the background, your guaranteed income remains the same.

Consulting with a regulated financial adviser can help to make sure your pension is invested in a scheme that suits your individual needs.

Your money invested

When you sign up for a pension you expect the money you invest to be safe and to grow. The pension manager for whichever provider you are with, will therefore place your money where it is most likely to be effective. As with most investments, some will thrive better than others.

In the short term, some investments may go down, but in the long term, if your money is placed correctly, other investments will bolster your funds and overall, it should perform well.

What are gilts?

A gilt is a type of UK government bond. Put simply, when you buy a bond, you are giving the issuer a loan which they agree to repay on an agreed date, plus interest payments.

 The UK government (and many global governments) sells gilts to investors in order to raise money. Buyers (often business institutions such as pension providers) pay a specific amount to receive a set yield (the yield is the interest rate which will generate the specific payments). Simply speaking, as the price of the gilt decreases, the yield increases.

Are gilts affected by inflation?

There are different types of gilt. The majority are termed conventional gilts which do not make adjustments for inflation. Index-linked gilts take inflation into account.

The government’s typical method for dealing with inflation is to raise interest rates – in fact, since December 2021, the Bank of England has raised interest rates fourteen times in order to reverse rising prices.

As interest rates rise so does the yield on gilts. This is obviously good news for investors as returns from buying these bonds will be higher. When interest rates rise, the price of gilts fall but the yield goes up. The shorter term gilts (1-2 years) tend to have the higher yields – a 10 year gilt will still see a higher yield but not so big in proportion.

Gilts are a good investment because usually they are secure and they can be sold at any time, but at times of inflation they could be unpredictable. It is therefore always recommended to invest in other sectors as well, as part of a diversified portfolio (such as a pension pot). Speaking with a regulated financial adviser can help you to make sure any investments you make, or have made, are right for you.

Short-term and long-term

Hopefully, inflation is a short-term crisis that will eventually steady. Traditionally in pensions, it is expected that individual and long-term investments grow beyond short term issues such as inflation.

It is therefore important that the pension fund manager invests in diverse sectors and monitors the economic climate closely. This way, long term investments should continue to perform well.


Handling bonds at a time of inflation can be a complex business. For instance, interest rate rises may also lead to a fall in liabilities. The costof keeping to contractual pension promises (especially with defined benefit pensions) are likely to fall. Also, if you are close to retirement then the benefits from gilts will be given serious consideration. For instance, it may not be astute to start investment in a ten year gilt when a customer only has five years to retirement. A regulated financial adviser is recommended if you are unsure how your savings and investments could be impacted.


A pension fund manager will invest your pension pot diversely to attain security and good performance over a long period of time. One type of investment is gilts which are bonds sold by the government to raise money. Current inflation has led to a decrease in gilt prices.

The good news is, the yield from gilts when prices go down, tend to increase. For this reason, pension fund managers in the UK are taking advantage of the higher rewards. The buying and selling of gilts must be taken in context of the overall economic climate. This fact again highlights why it is important to seek the knowledge of an experienced regulated financial adviser if you decide to invest in this area.,down%20from%206.8%25%20in%20July.

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