Popular gilt set to mature: where should investors turn next?

One of the most popular gilts among ii customers, T26 (UNITED KINGDOM 0.125 30/01/2026), is maturing in a week’s time on 30 January.

This gilt has been one option for investors looking to take advantage of the fact that capital gains on gilts are tax-free.

T26 had a low coupon, reflective of it being issued at a time when interest rates were at rock-bottom levels, meaning most of the return comes from capital gains as opposed to income.

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For investors looking to recycle their cash back into gilts, options include T26A (UNITED KINGDOM 0.375 22/10/2026), TN28 (UNITED KINGDOM 0.125 31/01/2028) and TG31 (UNITED KINGDOM 0.25 31/07/2031).

All the gilts have low coupons as they were issued during periods of low interest rates. Therefore, most of the gain comes from capital gains when the £100 principal is returned at maturity. Gilts are free from capital gains tax, although income tax is due on coupons if held outside ISAs or SIPPs.

While short-dated bonds typically have the attractive quality of lesser sensitivity to interest rates, it’s worth noting that with inflation easing and central banks beginning to cut interest rates, yields on short-term bonds have the potential to continue falling.

As interest rates come down, investors holding short-term bonds could see their income fall as they struggle to reinvest the proceeds from maturing securities with the same level of yield. This is so-called reinvestment risk.

For investors looking for greater coupons, options include TR30 (4.75% Treasury Gilt 2030), TR34 (4.5% Treasury Gilt 2034) and T42 (4.5% Treasury Gilt 2042).

Bear in mind that both TR30 and TR34 are trading slightly above their £100 issue price, so those buying now would make a small capital loss on the price if held to maturity before accounting for income received. However, as the bonds trade around their issue value, the coupon is relatively close to the distribution (income) yield on the gilts.

T42, which matures in 2042, may expose investors to big price swings as expectations regarding future interest rates develop over time. This is important to weigh up for those intending to sell rather than hold until the gilts’ maturity.

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There are even longer-dated gilts, such as TG50 (UNITED KINGDOM 0.625 22/10/2050) and TG61 (UNITED KINGDOM 0.5 22/10/2061). The duration (interest rate sensitivity) on these gilts is very high. Therefore, if long-term interest rates fall, this is expected to be beneficial for prices. However, if they rise, it is expected to have a negative impact.

Again, investors in these gilts may be exposed to substantial price volatility as expectations regarding future interest rates evolve. This is something to bear in mind if they intend to sell rather than hold throughout the decades until the gilts’ maturity.

In terms of funds, we’ve seen strong demand for money market funds over the past couple of years as investors took advantage of inflation-beating yields.

Such funds offer a cash-like return through investing in very low-risk bonds with short lifespans, typically just a couple of months. Returns, although never guaranteed, are typically in line with the Bank of England base rate.

In interactive investor’s latest ii Top 50 Fund Index, six money market funds appear in the ranking of the 50 most-bought funds, investment trusts and ETFs in the fourth quarter of 2025. They are Royal London Short Term Money Market (accumulating), Royal London Short Term Money Market (distributing), Amundi Smart Overnight Return ETF,Fidelity Cash Fund, Legal & General Cash Trust and Vanguard Sterling Short-Term Money Market.

The Royal London fund has been the most popular over the past couple of years as interest rates rose from rock-bottom levels to peak at 5.25%. Its accumulation share class was the most-bought fund overall in the fourth quarter of last year.

In recent times, money market funds have proven to be a solid allocation for cautious investors, or for those look to park cash for a short time. In 2025, money market funds returned 4%-plus in sterling terms, with negligible volatility.

However, interest rate cuts mean the amount of income such funds can generate is declining. With UK interest rates standing at 3.75%, and the expectation of one or two cuts in 2026, this will quickly feed through into lower future returns for these funds.

In theory, lower rates could lead some investors to take on greater risk elsewhere in pursuit of potentially higher returns.

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One route for investors with a slightly higher appetite for risk might be short-dated enhanced income funds, which generally offer more attractive yields. However, the trade-off is that a bit more risk needs to be taken versus money market funds that aim to deliver a cash-like return.

Alex Watts, senior investment analyst at interactive investor, says: “One option is the L&G Short Dated £ Corporate Bondd Index I Acc fund, which invests in investment-grade sterling bonds with less than five years to maturity, tracking the Markit iBoxx GBP Corporates 1-5 Index. The distribution yield is around 4.7% and the yearly fee is 0.14%.

“Investors may also consider direct gilts with one to five-year maturities. Gilts are secured by the creditworthiness of the UK government and aren’t subject to capital gains tax on maturity (just income tax on coupons), making low-coupon gilts a tax-efficient option.”

It was announced earlier this week that DIY investors will find it easier in future to invest directly in bonds issued by companies following policy changes.

The changes, previously outlined by the Financial Conduct Authority (FCA), reduce the administrative burden for companies issuing corporate bonds that come with lower “denominations”, or minimum investment amounts. These will drop from the old minimum of £100,000 to as little as £1.

The changes come as the FCA launched a package of regulatory reforms aimed at making it easier for UK companies to raise money. The moves are part of Chancellor Rachel Reeves’ drive to attract household savings into UK investments and provide a boost to London’s capital markets.