Buying bonds in a SIPP

What are bonds?

‘Bond’ is a term savers and investors will frequently come across; it loosely describes an agreement with a business or government to pay you interest in return for money that you have lent. 

You will often see cash accounts like fixed-rate savings accounts from banks and building societies referred to as bonds, then there are Premium Bonds offered by NS&I. 

However, in an investment context, the term bond usually refers to fixed-interest securities. These include loans to governments, known as government bonds or gilts and loans to businesses which are called corporate bonds.  

Both pay a fixed rate of return, but unlike savings plans, your capital is at risk if the borrower defaults on the loan. 

Which bonds can I hold in my SIPP? 

You can hold fixed interest securities in your SIPP, such as government or corporate bonds. These can include bonds from the UK as well as overseas markets. To be eligible for investment in a SIPP, bonds need to be listed on the London Stock Exchange. 

You can’t hold savings products like fixed-rate bonds that you see promoted in your local bank or building society, in a SIPP however. Nor can you put Premium Bonds into a SIPP. 

You can still hold cash in your SIPP, but you would need to use one of the cash deposit options offered by your SIPP provider. 

Why should I buy bonds for my SIPP? 

Bonds can play a useful role in any investment portfolio. Not only do they provide some helpful diversification in an equity-heavy SIPP, they can also reduce the overall risk of your portfolio. 

This can be particularly helpful as you get older and capital preservation starts to take priority over capital growth. 

Bonds can also be used to deliver a regular and reliable income to investors, which can be useful once you have retired and have entered into drawdown. 

Even though government bonds and corporate bonds are traditionally considered to be lower risk than equities, they are not without risk. The borrower, for example, may default on the loan, and the higher the yield of a bond, the greater this risk is. 

There is also an interest rate risk to consider.  A fixed rate of return will become more attractive when interest rates fall and the price of bonds will go up. By the same token if interest rates rise, your return will look less impressive and bond prices will start to fall. 

What is the best way to buy bonds for my SIPP? 

You can buy bonds direct through your SIPP platform, as you would buy shares. 

However as with shares, it may be cheaper and lower risk to buy a bond fund that invests in a range of bonds and is run by a fund manager on your behalf.