Low-Risk Fixed Income Options for UK Investors in 2025
- Alpesh Patel
- 6 days ago
- 33 min read
Updated: 22 hours ago
Updated December 2025
Introduction
With interest rates still elevated in late 2025 but inflation easing, UK investors have a range of low-risk fixed income opportunities to earn income on cash over a 12+ month horizon.
The Bank of England’s base rate stands at 4.0% (after a quarter-point cut in August 2025) amid cooling inflation (~3.6% CPI in Oct 2025)[1][2].
This environment means government bond yields and savings rates are attractive relative to recent years, though expected to gradually fall if further BoE rate cuts materialise in 2026[3].
Below is a practical guide to the main low-risk fixed income instruments – from UK government bonds (gilts) to NS&I savings products, bank fixed-term deposits, money market funds, and high-grade bond funds – including current yields, tax treatment, liquidity/access, and principal risks.
A comparison table is provided for quick reference. In a later section, we also explore global fixed income options (USD, EUR bonds, global bond funds/ETFs) available to UK investors, discussing currency considerations, access via platforms, and yield differentials versus UK assets.
UK Fixed Income Options (12+ Month Horizon)
UK Government Bonds (Gilts)
UK government bonds (“gilts”) are among the safest GBP investments, backed by HM Treasury. Yields on gilts in Dec 2025 are relatively high by historical standards – for example, 10-year gilt yields are ~4.5%[4] and 2-year gilts yield around 3.7–3.8%[5].
Shorter maturities (e.g. 1-year Treasury bills) also yield in the mid-3% range, reflecting expectations of future BoE rate cuts. Gilts pay semi-annual interest (coupon), but many older issues have low coupons (some <1%) meaning a large portion of return comes from price appreciation if held to maturity (since they trade below £100 face value and pull up to par at redemption)[6][7].
Access/Liquidity: Retail investors can buy gilts through broker platforms (Hargreaves Lansdown, AJ Bell, etc.). Many gilts are tradeable online (some less-liquid issues require phone orders with a broker fee)[8].
The minimum purchase is typically around £100 face value (1 “unit” of a gilt) and prices are quoted per £100. Gilts are highly liquid in normal market conditions – you can sell before maturity at market price, although that price fluctuates with interest rates. If held to maturity, the government repays the full face value (£100 per unit).
Current Yields: Yields vary by term: short-term gilts (1–2 year) yield roughly 3.7–3.8%, 5-year ~4.4%, 10-year ~4.5%, and 30-year ~4.6%[4][5]. The yield curve is fairly flat to slightly inverted, indicating markets expect modest rate declines ahead. For instance, the 1-year gilt yield (~3.7%) is similar to or lower than the 10-year (~4.5%), reflecting anticipated rate cuts over time. These yields are significantly above inflation (3.6% CPI)[1], offering a positive real return. By comparison, UK index-linked gilts (not covered in detail here) offer lower nominal yields but protect against inflation.
Tax Treatment: Gilts have favourable tax features. Interest (coupon) from gilts is taxable as savings income (no tax is deducted at source) and counts toward your Personal Savings Allowance (PSA) and income tax bands.
However, capital gains on gilts are completely tax-free – any profit from selling a gilt or at redemption is exempt from Capital Gains Tax[9][10]. This CGT exemption is valuable for higher-rate taxpayers or when gilt prices rise, especially since the annual CGT allowance was cut to £3,000 for 2024–25.
For example, if you buy a gilt below par and hold to maturity, that price gain is tax-free, whereas an equivalent gain on a corporate bond or bond fund could be taxable[9]. Additionally, no stamp duty applies on gilt purchases[10]. Holding gilts inside an ISA or SIPP shelters even the interest from tax[11].
Risk and Considerations: Gilts are considered virtually risk-free in terms of default (UK government has never defaulted in modern times).
The main risk is interest rate risk: if you need to sell before maturity, rising market yields will have reduced the gilt’s price, potentially causing a loss. Longer-duration gilts swing more in price for a given rate change. However, if held to maturity, you get the promised coupon and full principal (par value) back, eliminating interest rate risk at maturity. Liquidity is high in normal times, though gilt prices can be volatile (as seen in 2022’s sell-off when inflation spiked). Another risk is inflation – a fixed 4% yield could be eroded if inflation re-accelerates above that level (though current forecasts see UK inflation easing toward ~2.5% in 2026)[2]. Investors may diversify across maturities to manage reinvestment risk and consider holding gilts alongside cash or index-linked bonds to hedge inflation. Overall, gilts offer a secure, low-credit-risk option with known income, making them a good benchmark for low-risk returns in 2025.
NS&I Savings Products (Government-Backed)
Nationals Savings & Investments (NS&I) offers retail savings products backed 100% by HM Treasury, effectively giving sovereign risk safety similar to gilts. These are suitable for those who prefer bank-like accounts with guaranteed returns. Key NS&I options with 12+ month terms:
Guaranteed Growth Bonds (Fixed Term) – 1, 2, 3 or 5 year fixed-rate savings bonds (sold online as “British Savings Bonds”). Current 1-year rate is 4.20% AER (Issue 87), 2-year 4.10%, 3-year 4.16%, 5-year 4.15%[12]. Interest is paid at maturity (or annually for longer terms) and compounded in the bond. Minimum £500, max £1m per person. No withdrawals allowed until maturity[13] (capital is locked in). These rates are competitive with top bank deposits (though slightly below the very highest market rates)[14][15].
Guaranteed Income Bonds – Similar to Growth Bonds but pay out interest monthly to your bank account (rather than compounding). Rates are slightly lower gross to equate to the same AER: e.g. 1-year Guaranteed Income Bond 4.13% gross paid monthly (4.20% AER)[16]. Available 1–5 years (1-yr 4.20% AER, 2-yr 4.10% AER, etc., same AER as Growth Bonds)[17]. Terms and limits are the same (£500 min, no early access). These “Income Bonds” are useful if you want a regular interest income stream rather than growth.
Premium Bonds – NS&I’s popular prize-draw savings product. No fixed interest; instead a monthly prize draw. The prize fund rate is 3.60% (tax-free) as of late 2025[18], meaning on average you’d earn ~3.6% if you hold for a long time, though actual returns depend on luck.
Prizes (up to £1 million) are tax-free and you can withdraw money anytime without penalty, making Premium Bonds effectively an easy-access investment with government backing. They are very low risk (no capital loss, backed by Treasury), but the “interest” is not guaranteed – you might earn below the prize rate if you’re unlucky (especially on smaller holdings). Premium Bonds are more of a cash alternative with a fun lottery element; at 3.6% they lag fixed-rate bonds but the tax-free element can make them attractive for higher-rate taxpayers[19].
NS&I Direct Saver and Income Bonds (Variable) – These are easy-access savings accounts. Direct Saver pays 3.30% AER variable (interest yearly)[20]. NS&I Income Bonds (not to be confused with the fixed term ones above) pay 3.30% AER (interest paid monthly)[21]. They allow unlimited free withdrawals. However, private banks and building societies currently offer much higher easy-access rates (4.5%+), so NS&I’s variable accounts are not top picks unless you prioritise the government backing.
Tax Treatment: Interest from NS&I fixed-term bonds, Direct Saver, etc., is taxable as savings interest (paid gross)[22]. It counts toward your Personal Savings Allowance (£1,000 for basic-rate, £500 for higher-rate taxpayers). NS&I does not deduct tax, so you may need to declare interest if it exceeds your PSA. Premium Bond prizes are tax-free by law (which is a big draw for some investors)[19]. NS&I bonds are not ISA-compatible (NS&I has separate ISA products like a Direct ISA at 3.50% tax-free[23], but rates are lower than non-ISA). If you have spare ISA allowance, you might instead consider bank cash ISAs (see Fixed-term deposits below) for tax-free interest.
Access/Liquidity: NS&I fixed-term bonds cannot be accessed until maturity – no early withdrawal or closure (except within a 30-day cooling-off period)[13][24]. So you must be sure you won’t need those funds. By contrast, Premium Bonds and NS&I’s easy-access accounts allow withdrawals at any time without loss of interest (Premium Bonds typically cash out within ~3 working days). NS&I accounts are managed online (or phone/post) via the NS&I platform. There is no concept of market price for NS&I bonds – you simply get your deposit + interest at maturity (or prizes for Premium Bonds). This makes NS&I products straightforward and capital-stable (no fluctuation in value). Risks: These are ultra-safe instruments. NS&I is backed by the UK government’s credit – there’s effectively zero default risk up to the £1m per issue limit. The main “risk” is opportunity cost or inflation risk: if interest rates rise further or inflation remains high, your money is locked at a lower rate. Conversely, if rates fall, locking in a fixed 4.2% could look very attractive. Principal risk is nil as long as you hold to term (you will get your full deposit back; NS&I didn’t “bail in” even in 2008 crisis). NS&I’s guarantee exceeds even FSCS limits since it’s directly government-backed. Premium Bonds carry a risk of low returns (you might effectively earn less than 3.6% if you never win beyond small prizes, and inflation can erode the value of your holdings). Overall, NS&I bonds are ideal for those who value certainty of return and capital protection. Just be mindful of the lock-in and taxable status of interest.
Fixed-Term Bank Deposits (Fixed-Rate Savings Accounts)
Fixed-rate savings accounts (also called fixed-term deposits or bonds) from banks and building societies are another low-risk option. You deposit money for a set term (typically 1 to 5 years) at a fixed interest rate. Unlike bonds, these are not tradeable – you generally cannot withdraw early (or can only do so with hefty penalties or notice, if allowed at all). In exchange for illiquidity, they offer a guaranteed rate and FSCS protection.
Current Yields: As of December 2025, 1-year fixed savings rates are around 4.4–4.6% AER at the top end. For example, Kent Reliance offers 4.51% AER for 1-year fix (min £1,000)[14], and several other providers are in the 4.4–4.5% range. Even high-street names (or their subsidiaries) have ~4.2–4.3% for 1-year. 2-year fixes are roughly 4.3–4.4% at best (e.g. 4.42% from Kent Reliance)[25], reflecting a slightly inverted yield curve (longer term not much higher yield). 3- and 5-year fixes are only marginally above 1-year (~4.25–4.3% AER)[26][27]. This means there’s little reward for locking in beyond 1–2 years unless you strongly expect rates to drop soon. Banks also offer shorter fixes (6 or 9 months), but with similar or slightly lower rates.
Tax Treatment: Interest on bank deposits is taxable (paid gross since 2016). It counts toward your Personal Savings Allowance. Interest is typically paid at maturity for 1-year bonds (or annually for longer terms), which means it will all count in the tax year it matures[28].
Some accounts let you choose monthly or annual interest – monthly payouts can help spread interest across tax years[29]. You can alternatively use a Cash ISA fixed-term deposit – many banks offer ISA versions of fixed rates (usually slightly lower rate, ~0.1–0.3% less). Interest in an ISA is tax-free, which can be beneficial if you’ve used up your PSA or are higher rate. For example, top 1-year cash ISAs in Dec 2025 pay around 4.1%–4.3% (versus ~4.5% non-ISA). If you have room in the £20k ISA allowance, the tax saving might outweigh the slight rate reduction.
Access/Liquidity: Funds are locked in for the term. Generally, you cannot withdraw or close the account early. A few providers allow early access with an interest penalty (e.g. loss of 90 or 180 days interest), but many do not permit any early withdrawals at all. So treat it as illiquid for the duration. The minimum deposit varies – some banks only require £500 or £1,000; others might have higher minimums for top rates (£10k via certain platforms). Upon maturity, you can withdraw or re-lock in a new term. These accounts are not tradable or transferable (except transferring an ISA to another provider, which often means waiting until maturity or paying penalties).
Safety (FSCS Guarantee): Fixed-term savings with UK regulated banks and building societies are protected by the Financial Services Compensation Scheme up to £120,000 per person, per institution as of 1 December 2025[30][31]. (The FSCS limit was recently raised from £85k to £120k to reflect inflation and boost confidence in banks[30].) This means if the bank fails, deposits up to £120k are reimbursed by FSCS (typically within days). If you have more than £120k, spread it across different banking licenses to stay within the insured limit. Practically, the default risk of a UK-regulated bank is very low, and FSCS adds an extra layer of protection making these deposits near risk-free for principal (up to the limit).
Comparing to NS&I: NS&I has 100% HM Treasury backing and no explicit cap, but in practice for amounts under £120k, a bank deposit is equally safe thanks to FSCS. NS&I’s 1-year 4.20% is a bit lower than the market-best ~4.5%[14], so you pay a small “safety premium” for NS&I (and NS&I allows £1m, useful for very large sums). Bank fixes via smaller challenger banks often offer the highest rates – these banks are fully FSCS-covered and use deposits to fund lending. It’s worth using comparison sites or marketplaces (like Hargreaves Lansdown Active Savings or Raisin or MoneySuperMarket) to find top rates. Some platforms (e.g. HL Active Savings, AJ Bell Cash savings) let you access multiple banks’ fixed-term accounts under one umbrella, simplifying application.
Risks: Virtually no risk to capital if within FSCS limits and you don’t need funds early. The main risk is liquidity risk – you cannot get your money out if your circumstances change, so keep an emergency fund elsewhere. Also, reinvestment risk: if you lock at 4.5% for 1 year, and next year 1-year rates have dropped to (say) 3%, your future options might be lower – consider laddering (staggering maturities). Conversely, if interest rates rise unexpectedly, you could miss out on higher rates by being locked in (though as of late 2025, most forecasts see stable or falling rates given inflation’s downward trend[2]). Inflation risk is that your fixed interest might be outpaced by inflation – currently inflation ~3.6% and falling[1], so a 4.5% yield is positive real return; but if inflation spiked again above your yield, your real return turns negative.
Overall, fixed-term savings are a straightforward, low-risk option for 1–5 year horizons, especially if you value a guaranteed return and have no need for flexibility. Just plan your cashflow to avoid needing an early exit. Many investors ladder deposits (e.g. part in 1-year, part in 2-year) for flexibility. Given the current flat yield curve[26], a 1-year may be preferable unless you want to lock income through 2027.
Money Market Funds (Cash Funds)
Money Market Funds are low-volatility mutual funds that invest in short-term, high-quality debt instruments – essentially a way to get cash-like returns with daily liquidity. They invest in things like Treasury bills, short-dated government or corporate bonds (under ~1 year), certificates of deposit, and cash deposits[32][33]. By law/regulation, UCITS money market funds maintain high credit quality and a very short weighted maturity (often <60 days average), which minimises risk. They aim to slightly outperform bank deposit rates by pooling investor cash to buy money market securities. In 2025’s high-rate environment, money market fund yields are quite attractive, near parity with central bank rates.
Current Yields: Yields on sterling money market funds are roughly ~3.8%–4.1% in late 2025, reflecting the BoE base rate (4.0%) minus a small fee. For instance, the SONIA (Sterling Overnight Average) rate is just below 4%, and funds targeting short-term govt/commercial paper yield around the same. Aberdeen (Abrdn) estimates “cash” yields around 4.0% versus ~4.6% for 1–3yr corporate bonds[34]. Many sterling liquidity funds report 7-day yields near 3.9–4.0%. These yields will move downwards if BoE cuts rates in 2026 (and up if rates rose). Unlike a fixed deposit, the yield is variable – it resets as the fund reinvests in new short-term instruments.
Access/Liquidity: Money market funds are offered by major asset managers (e.g. BlackRock, Fidelity, Vanguard, Insight, etc.) and can be bought through investment platforms (HL, AJ Bell) like any fund or ETF. There are “accumulation” share classes (reinvest interest into NAV) or “income” classes (pay out interest monthly). You can typically sell any business day with T+1 or T+2 settlement, making them very liquid. Some platforms allow them as a cash sweep or temporary parking place for funds in between investments. Importantly, MMFs do not have FSCS protection, but they mitigate risk by diversification and high credit quality holdings[35]. Many funds try to maintain a stable NAV ~£1 (especially “LVNAV” money funds), though the price can fluctuate slightly in stress scenarios.
Tax Treatment: Interest from money market funds is usually distributed as interest (gross) for tax purposes (because these funds hold >60% in cash/bonds, their distributions are treated as savings interest, not dividends, under UK tax rules). That means it uses your PSA and is taxed at marginal income tax rates on savings. Accumulation classes still generate taxable income (reinvested) that needs to be reported. If held in an ISA or SIPP, the interest is tax-free. Money market funds themselves don’t deduct tax.
Principal Risk: These funds are very low risk, but not entirely risk-free like an FSCS-guaranteed bank account. Key risks include: Credit risk – a default of an issuer in the fund’s portfolio (e.g. a bank whose CD the fund holds) could cause a loss. Funds mitigate this by holding only high-grade short-term debt and spreading across many issuers and government securities[35]. Interest rate risk – if rates rise sharply, fixed short-term holdings lose a bit of value, potentially making the fund’s NAV dip temporarily[36]. However, since maturities are so short (often under 3 months), the fund can quickly roll into higher-yield instruments, and any price dip is usually small and recovered as those holdings mature at par[36]. In periods of market stress, liquidity could be an issue (as seen in March 2020 when central banks had to backstop MMFs), but regulators have strengthened liquidity requirements since. Some funds may impose liquidity fees or redemption gates in extreme circumstances, though this is rare.
In normal times, money market funds aim to preserve capital and provide a yield slightly above bank deposit rates[37][38]. They are used by many as a cash management tool: for instance, a higher-rate taxpayer can hold cash in a MMF inside a Stocks & Shares ISA to earn ~4% tax-free, with instant access. Compared to an instant-access bank account (paying ~4.5% at best), MMFs are competitive, though keep in mind the lack of FSCS guarantee is the trade-off for potentially a 0.1–0.2% higher return and convenience. Overall, the risk of loss is very low, but it’s not zero – a critical difference if absolute capital safety is required. For most investors, sterling MMFs from large providers offer a good combination of liquidity and yield, functioning as a near-cash holding in a portfolio.
Investment-Grade Bond Funds (UK Focus)
For a bit more yield than pure cash or gilts, UK investors can consider bond funds that hold a diversified portfolio of high-quality bonds (e.g. government and investment-grade corporate bonds). These are still relatively low-risk in credit terms, though they introduce market volatility since the fund’s value fluctuates with bond prices. Bond funds can be open-ended funds (unit trusts/OEICs) or ETFs.
Two common types for low-risk seekers are Short-Duration Investment-Grade funds and Aggregate or Strategic bond funds: - Short-Term Investment Grade Bond Funds:
These focus on short maturity bonds (e.g. 1–3 year corporates, short government bonds). Because of the short duration, they have limited interest rate risk (a sharp rate move causes only a small price change).
Yields are a bit higher than money market funds due to slightly longer maturities and some credit spread. For example, as of Nov 2025, a 1–3 Year Sterling Corporate Bond index yields about 4.6% – roughly 0.6% higher than overnight cash[34].
Many short-term bond funds yield in the ~4.0–4.5% range at present, comprised of high-quality corporate and government bonds. For instance, Vanguard’s UK Short-Term IG Bond Index fund yields ~4.1% (avg maturity ~3 years)[39].
These funds’ NAVs can dip if rates jump, but since bonds mature quickly, volatility is low and they historically rarely have negative 12-month returns[40][41]. They offer an income pickup with modest extra risk: about “cash+0.5%” yield.
UK Aggregate or Corporate Bond Funds: These hold a broader mix of intermediate-term bonds, including UK gilts and/or corporate bonds (investment-grade, and sometimes a small portion in high-yield). With longer duration (5–10 years) they yield a bit more but swing more with interest rates. For example, a broad UK investment-grade corporate bond index fund (avg maturity ~7.5 years, A-rated) has a yield-to-maturity ~4.9% and duration around 6–8 years[42]. A gilt index fund (all maturities) yields ~4.4–4.5% similar to 10-year gilts. Strategic bond funds (which can mix gov’t, corporate, some high yield) in late 2025 often yield 5–6%, but that higher yield may include more credit risk (BBB/BB bonds). For low-risk purposes, focus on funds with high average credit quality (A or better) and moderate duration. Yields around 4–5% are common for high-grade bond funds now. Notably, these yields are paid as income distributions which are taxable as interest outside ISAs.
Tax Treatment: Bond fund distributions are typically classed as “interest distributions” (for funds holding ≥60% in fixed-income assets). That means they are taxed like bank interest (no dividend tax; instead they fall under the savings income category). You can use the Personal Savings Allowance against this interest. Any capital gains from selling fund units could be subject to CGT (though selling units after a modest price rise might not exceed the £3k CGT allowance, but it’s a consideration – unlike gilts themselves which are CGT-free). In an ISA/SIPP, bond funds grow and pay out tax-free.
Liquidity & Access: Bond funds and ETFs are easy to buy on investment platforms. Open-ended funds price daily; ETFs trade intraday. You can typically sell at any time at the current NAV/market price. There may be small bid-offer spreads on ETFs, and fund managers can impose short-term trading fees or gating in extreme markets (rare for high-grade bond funds, more for illiquid credit funds). In normal conditions, these are quite liquid. They’re suitable for holding within ISAs (common for income investors).
Risks: The main risk is market risk – the fund’s value will fluctuate with interest rates and credit spreads. Unlike an individual bond held to maturity (where you get a guaranteed redemption at par), a bond fund is perpetual: there’s no fixed maturity or par value to anchor to. If interest rates rise, the fund’s NAV falls; if they fall, NAV rises. For example, a fund with duration ~6 would lose ~6% if yields rose by 1% (and vice versa). In 2022, bond funds saw notable declines when yields spiked. However, entering 2025, much of that adjustment has happened and yields are comparatively high, providing a cushion. If rates gradually decline as forecast, bond funds could even see capital gains (in addition to yield) as their older bonds rise in price. Conversely, a surprise surge in inflation/rates would hurt NAV. Credit risk in investment-grade funds is low – defaults on IG corporate bonds are rare, and funds usually hold dozens of issues. There’s some spread risk (if corporate bond spreads widen in a recession, prices dip). But IG bonds tend to behave much more stably than equities.
One important point: bond funds do not guarantee return of principal the way an individual bond or FSCS deposit does. You’re subject to market value at sell time. As RBC Wealth Management notes, a government bond ETF won’t “pull to par” like a bond held to maturity – its price depends on market yields at the time[43]. So if you have a hard 1-year goal, a bond fund isn’t a guaranteed 1-year instrument (you’d be better with an actual 1-year bond or deposit). However, over long horizons, high-quality bond funds have low default risk and tend to mean-revert in price.
Use Case: Bond funds can play a role in a diversified portfolio, providing higher income than cash with moderate stability. For a 12–24 month horizon, short-term bond funds are a popular choice for slightly boosting yield with minimal NAV volatility – essentially a step out on the risk curve from money market funds[44][45]. For longer horizons, intermediate bond funds (gilt or corporate) can lock in today’s yields and potentially give capital upside if yields fall. Just be aware of the volatility and ensure you’re comfortable riding out any interim dips. If an investor absolutely cannot tolerate any capital fluctuation, then stick to cash deposits or hold bonds to maturity, rather than bond funds.
Summary of UK Options: Below is a comparison of key features of the above UK fixed-income options:
Option | Current Yield (Dec 2025) | Tax Treatment | Access & Liquidity | Principal Risk |
UK Government Bonds (Gilts) | Interest taxable as income; no CGT on gilt gains[9]. Can hold in ISA/SIPP to shield interest. | Tradeable in secondary market (via broker). Some gilts online, others by phone; highly liquid. No access restriction but price varies. | Very low credit risk (UK sovereign). Interest rate risk (price can drop if yields rise). Hold to maturity to get full par value (no loss)[6]. | |
NS&I Guaranteed Bonds | Interest taxable (paid gross)[16]; Premium Bond prizes tax-free. No tax on NS&I capital (no capital gain concept). | No early access to term bonds[13] (locked-in till maturity). Premium Bonds and NS&I easy-access accounts withdrawable anytime. | Backed by HM Treasury (no default risk). Liquidity risk (cannot withdraw fixed terms early). Premium Bonds: no guaranteed return (risk of below-average prizes). Inflation can erode fixed 4% returns. | |
Bank Fixed-term Deposits | Interest taxable (PSA applies). Interest usually paid at maturity (counts in that tax year)[28]. Tax-free if inside Cash ISA. | Locked until maturity (no withdrawals; or penalty if allowed). Requires opening account (or via savings platform). Upon maturity, free to transfer/withdraw. | FSCS-protected up to £120k per bank[30] – virtually no default risk if within limit. Liquidity risk (funds inaccessible during term). Low inflation risk if term is short, but longer fixes can lag if rates/inflation rise. | |
Money Market Funds (Sterling) | ~3.8–4.0% yield (variable, floats with BoE rate)[34]. (Net of ~0.1–0.2% fees). | Fund distributions taxed as interest (gross) for individuals. No withholding; declare if over PSA. Tax-free in ISA. | Highly liquid (trade daily; T+1/2 settlement). Purchase via broker fund platform. No withdrawal penalties (it’s like selling a fund). Some funds aim for stable £1 NAV. | Very low risk diversified short-term holdings. Potential slight NAV fluctuations if rates rise fast[36] or if an issuer defaults. No FSCS, but underlying assets are high quality. Considered near-cash, but not 100% guaranteed stable (though historically very safe). |
High-Grade Bond Funds (UK) | 4–5%+ yields depending on portfolio. E.g. short IG corp ~4.5%[34]; broad IG index ~4.8–5%; gilt index ~4.4%. Income paid quarterly or monthly. | Distributions taxed as interest (for >60% bond funds). Capital gains taxable on sale (gilts inside fund lose CGT exemption). Use ISA to avoid tax. | Daily liquidity (open-ended funds) or intraday for ETFs. Easy to buy/sell via platforms. No fixed maturity – can hold indefinitely or sell anytime at market price. | Interest rate risk: fund NAV will fall if yields rise (no maturity to redeem at par)[43]. Credit risk: low if investment-grade focus (diversified issuers, few defaults). NAV volatility moderate (short-duration funds low volatility; longer-duration funds higher). No principal guarantee – could incur loss if sold during unfavorable market, though interest income offsets over time. |
Sources: UK Debt Management Office data (via Investing.com) for gilt yields[4][5]; NS&I official rates[12][18]; MoneySavingExpert best savings tables for fixed-term deposit rates[14][25]; Aberdeen (Abrdn) research on short-term bond yields[34]; HL platform data for global bond fund yields and tax treatment[10][46].
Global Fixed Income Opportunities for UK Investors
Investing beyond the UK can enhance yield or diversification, but introduces currency risk and different market dynamics. This section covers USD and EUR-denominated bonds (especially U.S. Treasuries and other high-grade sovereign debt), as well as global bond funds/ETFs that UK retail investors can access. We discuss how yields abroad compare to UK instruments and the practicalities of buying these as a UK investor.
Key considerations: When buying foreign-currency bonds, you face GBP exchange rate fluctuations. A strengthening pound will reduce returns on unhedged foreign bonds (and a weakening pound boosts them). You can mitigate this by using GBP-hedged funds/ETFs, which eliminate most currency moves at the cost of a small fee/interest differential. Also, access may be different – individual overseas bonds might not be offered by all UK brokers (some allow trading in nominee accounts or via phone deals), but there are many ETFs and funds that package foreign bonds for easy purchase. Tax-wise, foreign bond interest is still taxed as normal savings interest in the UK; overseas government bond interest has no UK withholding tax typically (US Treasuries pay interest gross to foreign investors). Any currency gains on foreign bond principal are not separately taxed as FX, they are part of the overall capital gain/loss on the investment (gilts remain CGT-free but foreign bonds are not exempt). Now, let’s look at specific global segments:
US Dollar Bonds (U.S. Treasuries and others)
U.S. Treasuries – the bonds issued by the U.S. government – are often considered the world’s safest asset and are highly liquid. For UK investors, USD bonds can offer yield pickup at times, as well as diversification. As of Dec 2025, U.S. Treasury yields are in a similar ballpark to UK gilts for many maturities: the 10-year US Treasury yields ~4.2%[47] (vs ~4.5% UK 10y), and the 2-year U.S. Treasury ~3.5%[47] (vs ~3.8% UK 2y). The U.S. yield curve in late 2025 is no longer deeply inverted; short-term yields have fallen a bit after Fed rate cuts, whereas longer yields hover around 4–4.3%[48][47]. This means a UK investor can earn roughly comparable nominal yields on USD high-grade sovereign debt as on GBP debt, though the USD/GBP exchange rate will ultimately determine your return in GBP terms.
Example yields: A 1-year U.S. Treasury bill yields about 3.7% (and is AAA rated). 10-year Treasuries ~4.1–4.2%[48]. U.S. investment-grade corporate bonds yield higher – e.g. US Aggregate Corporate index yields around 5–5.5% in late 2025 (given U.S. base rates ~5% earlier in year and credit spreads). However, investment in individual U.S. corporate bonds may be difficult for retail; easier via funds.
Access: UK retail investors can buy U.S. Treasuries through certain brokerages – some platforms (like Interactive Brokers, or multi-currency accounts) allow direct purchase of US Treasury bonds/bills (settling in USD). Hargreaves Lansdown and AJ Bell may offer limited access (often via phone trades) to some international bonds, but it’s not their core offering. A practical route is to use ETFs: for example, an ETF like iShares $ Treasury Bond ETF or Vanguard USD Treasury ETF can give exposure to U.S. gov bonds. There are ETFs targeting various maturities (e.g. 1-3yr Treasuries, 7-10yr Treasuries, etc.). Many of these ETFs have GBP-denominated tickers on the LSE, but note if they are unhedged, they will deliver USD returns converted to GBP (so currency moves affect the price). Some providers offer GBP-hedged share classes (e.g. an ETF that holds USD bonds but uses forward contracts to hedge USD/GBP, so your return approximates the USD bond return plus a small “cost” or sometimes gain from the interest rate differential).
If you don’t want currency risk, choose hedged funds – but be aware hedging can wipe out yield advantages if UK rates are higher than US rates. In 2025, US short rates are slightly higher than UK, so hedging USD→GBP might add a bit of yield (because you earn the rate differential).
Currency risk: If unhedged, you take USD/GBP risk. For instance, suppose GBP is $1.30 now. If GBP strengthens to $1.40 in a year (~8% move), that would roughly cut an unhedged US Treasury’s GBP value by -7% (offsetting the ~4% yield).
Conversely, if GBP fell to $1.20, you’d gain currency upside. This adds volatility – essentially, USD bonds for a UK investor behave like a combination of a bond + a USD exposure. Over long periods, currency moves can dominate the local bond return. Hedged funds remove this swing, locking in the interest rate differential instead.
Tax: U.S. Treasury interest is paid gross to overseas investors (no U.S. withholding tax on Treasuries). In the UK, you’d declare it as foreign interest (which falls under your normal savings interest taxation). If held via a UK fund/ETF, the fund will handle any U.S. tax treaties, etc., and pay distributions to you (most Ireland-domiciled ETFs also pay bond interest gross).
U.S. Treasuries are exempt from UK CGT only if held in a gilt-edged account? (Actually, no, only UK gilts and certain UK domestic bonds are CGT-free – foreign bonds are not exempt). However, if you buy via a fund, any capital gains on selling the fund are subject to CGT like any fund.
Principal risk: U.S. Treasuries have essentially zero default risk (backed by U.S. government, rated AA+). The main risk is, again, interest rate risk and currency risk. U.S. rates might move differently than UK – e.g. if the Fed cuts faster, U.S. bonds might rally (good for prices) but also the dollar might weaken (offsetting for a GBP investor).
Or vice versa. So it adds a layer of macro factors. Liquidity of Treasuries is excellent; ETFs tracking them are also very liquid on exchanges.
Other USD bonds: There are also dollar bonds from organizations like the World Bank (AAA rated “supra” bonds) or other governments (e.g. Canadian, Australian bonds often in USD). Yields depend on their credit (e.g. an AAA supranational might yield slightly above Treasuries).
Many global bond funds hold some of these. For a retail investor, picking individual foreign bonds is less common; using broad funds can give exposure more conveniently.
Euro and Other Foreign Bonds (EUR, JPY, etc.)
Euro-denominated sovereign bonds offer lower yields generally, reflecting lower interest rates in the eurozone. For example, German Bunds (10-year) yield only about 2.7–2.8% in Dec 2025[49] – much lower than 10-year gilts (4.5%).
Even Italian 10-year bonds yield ~3.8% (higher than Germany due to credit risk, but Italy is BBB-rated, not “risk-free”). So for a UK investor, EUR high-grade bonds like German, French, Dutch bonds don’t offer an income advantage – they yield less than UK equivalents.
Their appeal would be if one expects the euro to strengthen against the pound (which would boost returns when converting back), or for diversification. Short-term EUR rates are also lower: the ECB’s depo rate in 2025 is around 3.25%, and 2-year German bonds yield ~2.1%[50].
Access: You can access EUR government bonds via ETFs (e.g. iShares Core Euro Government Bond ETF) or funds. There are also high-grade EUR corporate bond funds, but again yields ~3–4%.
If you have a euro brokerage account or use a platform like Tradeweb via interactive brokers, you could buy individual bonds, but most UK retail stick to funds for foreign bonds unless they have specific currency needs.
Currency: The EUR/GBP risk will affect returns significantly, similar to USD discussion. Because euro yields are so low, an unhedged euro bond is basically a currency speculation with a small interest kicker. If the pound strengthens against the euro, euro bond returns to a UK investor could be negative (since 3% yield can be offset by a 5% FX move easily).
If you want euro exposure (perhaps believing the ECB might cut rates less aggressively than BoE, or as a hedge in case GBP weakens), you might accept that. Otherwise, it usually makes sense to hedge euro bonds when the yield gap is large.
Note: hedging euro to GBP would cost yield if UK rates > euro rates (because you’d effectively pay the rate difference), roughly equal to that difference.
In 2025, UK base ~4%, Euro base ~3.25%, so hedging EUR→GBP might cost ~0.75% per year (meaning a 2.7% Bund yields ~2.0% to a GBP-hedged investor – very low).
Thus, a hedged euro bond fund may not be attractive yield-wise compared to just buying a UK gilt.
Other currencies: Japanese government bonds yield even less (~1% on 10-year JGBs after the BoJ’s adjustments). Swiss bonds near 1%. These don’t make sense for yield hunting; only for very specific deflation hedges or currency bets (and are beyond our scope of “low-risk for yield” since their yields are so low in GBP terms).
Emerging Market local bonds (e.g. India, Brazil) can yield high (6–10%), but those come with significant currency and credit risk – not “low-risk” in the sense intended here, so we exclude them.
In summary, global high-grade sovereigns currently yield either similar (U.S., some Commonwealth countries) or much lower (Eurozone, Japan) than UK instruments.
Without currency moves, a UK investor doesn’t gain much income by holding, say, German bonds at 2.7%. Thus, the primary reason to buy these would be diversification (perhaps you want some assets not correlated with the UK economy or you have euro liabilities) or as part of a global bond fund for completeness.
Global Bond Funds and ETFs
For one-stop diversification, there are global bond funds that invest across countries and currencies. Many follow indices like the Bloomberg Global Aggregate (which includes developed market government and corporate bonds in multiple currencies).
Typically, global bond funds targeted to UK investors use currency hedging to remove FX risk – this way, you earn the underlying bonds’ yield relative to GBP. The Vanguard Global Bond Index Fund (GBP Hedged), for example, covers thousands of global investment-grade bonds. Its yield (hedged) is about 3.2% as of Nov 2025[46].
That relatively low yield reflects the large weight of low-yield markets (US, Euro, Japan) and the cost of hedging from those currencies to GBP. In essence, a global agg fund gives you broad exposure but currently yields less than purely UK-focused funds, because globally not all regions have as high rates as the UK.
If rates in the UK fall more than elsewhere in coming years, a global fund’s yield might become competitive.
Global government bond ETFs: There are ETFs like iShares Global Govt Bond ETF (IGLO) which hold a mix of US Treasuries, European gov, Japan, etc. Many come in GBP-hedged versions (IGLH is the hedged ticker, for instance).
Yields on a hedged global gov bond ETF are around 3% currently. Without hedging, the yield might appear higher (in USD terms ~4%), but then you carry currency volatility (effectively you’d be heavily exposed to USD, EUR, JPY movements).
Global corporate bond funds similarly invest in corporate debt worldwide; hedged yields might be ~4% (since US and UK corporate yields are higher, boosting the average).
High-grade vs high-yield: Note that some global bond funds include a small allocation to high-yield (junk bonds) or emerging markets for extra yield. These obviously add credit risk, moving them out of the pure “low-risk” category.
Stick to funds described as Global Aggregate* or *Global Investment Grade for high quality. Read the fund’s fact sheet for average credit quality (should be A or BBB+). If it’s “Global High Yield”, that’s a different, riskier product (yields ~7–8% but with default risk akin to equities).
Access: All major broker platforms offer a selection of global bond funds and ETFs. For example, AJ Bell or HL let you buy Vanguard Global Bond Index (an OEIC), or the iShares Global Aggregate Bond ETF. You can also access more specialised ones like Global Inflation-Linked bond funds or Global short-duration funds.
If you want USD exposure without hedging, you could even buy a US-listed ETF via an international broker (though UK platforms mostly stick to UCITS ETFs). Generally, using a GBP-hedged global fund is simplest to get broad exposure without having to manage FX yourself.
Use Case: A global bond fund (GBP hedged) can act as a core bond holding that balances exposure across regions – useful if you believe in diversification and don’t want to bet solely on UK rates. It can also provide stability if, say, the UK economy has an idiosyncratic issue (global bonds might not correlate 100%).
However, note that during global shocks (e.g. 2022 inflation), most developed bond markets fell together, so global diversification didn’t help much then. But if, for instance, the UK had a surge in inflation relative to Europe/US, unhedged global bonds could gain via currency. It really depends on the scenario.
Currency risk in global funds: If GBP-hedged, you remove currency volatility, so the fund should behave like a UK bond fund with a different mix of duration/credit. If unhedged, a “global bond fund” is heavily a currency play: e.g. roughly 45% USD, 25% EUR, 5% JPY, etc.
Historically, unhedged global bond indices have equity-like volatility due to FX swings, so for a low-risk strategy hedging is recommended.
Yields vs UK: We’ve noted that hedged global yields (~3% for gov, ~3.5% for global agg) are lower than UK-focused yields. Why might one still invest? One reason could be expectation that GBP will weaken – if you think the pound might fall, an unhedged global bond fund would profit from that (e.g. USD and EUR appreciation could add to returns).
Another reason: diversification of central bank risk – maybe the BoE cuts rates more aggressively than the Fed/EBC, which could make UK yields drop and UK bond prices rise more (benefitting UK bonds actually), or vice versa. It’s complex.
Many advisors suggest holding the majority of bonds hedged to your home currency to ensure the fixed income part of your portfolio remains stable and predictable.
Risks: Global bond funds carry the same interest rate and credit risks discussed before, just spread across jurisdictions. Currency risk if unhedged. Also, they tend to have slightly longer duration than a pure UK fund (because places like Europe have longer average maturities outstanding).
For example, the Bloomberg Global Aggregate has a duration around 7 years. So a global agg fund will be sensitive to rate moves across the world. If global yields all rise together, the fund falls. If they fall, the fund rises.
There is also political/country risk in some cases (though most global funds stick to highly rated sovereigns, you are exposed to each government’s policy – e.g. Japanese bonds yield little, which drags the average down).
In summary, global high-grade bonds can be part of a low-risk portfolio for diversification, but a UK investor should weigh the lower yields and currency issues.
Often, UK investors pick selective global exposures (like US Treasuries for slightly higher yield or diversification) or use global funds hedged to GBP for broad exposure.
To illustrate, here’s a quick comparison of some global opportunities vs UK:
Global Option | Yield (Dec 2025) | Currency Risk | Access Methods | Notes / Risks |
U.S. Treasuries (USD) | High if unhedged (USD/GBP moves can +/- returns). Hedged GBP share classes available (eliminate most FX). | Direct via broker (with USD account) or via USD bond ETFs. Many London-listed ETFs for U.S. Treasuries (some GBP-hedged). | AAA credit (very low default risk). Yields on par with UK gilts. USD rate trends and Fed policy key. Unhedged adds FX volatility (GBP strength would hurt). Very liquid market. | |
Eurozone Gov Bonds (EUR) | ~2.8% (10yr Germany)[49]; ~2.1% (2yr Bund). Peripherals higher (Italy ~3.8% 10yr). | High if unhedged (EUR/GBP). Hedging GBP eats into yield (due to lower EUR rates). | Euro gov bond funds/ETFs (e.g. iShares Core Euro Govt). Direct purchase possible on some platforms for larger investors. | Germany/France are AAA/AA rated (virtually no default risk). Yields significantly lower than UK – not advantageous unless expecting euro appreciation. In GBP-hedged terms, yield ~2% net, which is low. |
Global Bond Funds (Agg Index) | ~3.0–3.5% yield (GBP-hedged)[46]. Unhedged yield ~4% but comes with currency swings. | Available hedged or unhedged. Hedged = minimal FX risk. Unhedged = essentially a play on USD, EUR, JPY vs GBP. | Many options: Vanguard Global Bond Index (OEIC), iShares Global Agg Bond ETF, etc. Choose GBP-hedged version for stability. Buy via any fund platform or brokerage. | Broad diversification (hundreds of bonds). High average quality (global agg ~AA/A). Interest rate risk: moderate (duration ~7). Will rise/fall with global yield trends. Good for one-stop exposure but currently lower yield than UK-focused funds. |
Global Corporate Bonds (IG) | ~4–5% (hedged) depending on mix (US corps ~5%, Euro corps ~3%). Global IG hedged fund ~4% yield. | Hedged share classes available (recommended to avoid multi-currency risk). | E.g. iShares Global Corporate Bond ETF (GBP-hedged). Also global aggregate funds include corporates. | Higher yield than global govt due to credit spread. Still high-grade (A/BBB). Slightly more volatile if credit spreads widen. Watch out for any high-yield portion in some “global bond” funds (stick to IG). |
High-Grade Asia/Pacific Bonds (AUD, CAD, etc.) | ~4% (Australia 10yr ~4.2%, CAD 10yr ~3.7%). These often included in global funds. | FX risk if held directly (AUD/GBP etc). Can access via hedged global funds. | Niche ETFs for specific countries exist, or use global/regional funds. | Some countries like Australia/New Zealand have relatively high yields and strong credit, but direct investment involves currency risk. Could be an opportunity if one anticipates GBP weakness against those currencies. Otherwise, hedged global funds include them in portfolio. |
Note: All yields are indicative and fluctuate with market conditions. Currency risk can be mitigated by hedged products but understand the impact of interest differentials on hedging costs.
Outlook and Other Considerations
When constructing a low-risk fixed income strategy in late 2025, keep in mind the macro outlook: Markets are pricing in that the Bank of England may continue gently cutting rates through 2026 as inflation falls toward target[2].
If this holds true, future yields on new deposits and bonds could be lower. This argues for locking in attractive rates now (e.g. 1–2 year fixes or intermediate bonds) if you don’t need liquidity, to enjoy above-average yields before they potentially decline.
On the other hand, if inflation surprises to the upside or the economy re-accelerates, central banks could pause or even hike – under that scenario, floating rate and short-term instruments (or staying in cash to reinvest at higher rates) would outperform. It’s wise to diversify across durations (some cash, some 1-year, some longer) to balance these risks.
BoE vs Fed vs ECB: Divergences in monetary policy will affect currency and relative yields. In late 2025, the BoE and Fed both have rates around 4% (after cuts), whereas the ECB is slightly lower ~3.25%.
The pound’s strength will be influenced by these differentials and the UK’s fiscal situation (e.g. any bond market concerns around government borrowing could lift gilt yields). So far, markets are calm and the UK’s 10-year yield is only modestly above U.S. 10-year (about +0.3 percentage points)[4][47].
Monitor the Bank of England guidance – if they signal faster cuts (due to, say, recession risks), longer-term bond funds could rally (prices up, yields down), benefiting holders. Conversely, any hint that inflation isn’t defeated could keep yields high.
Inflation-linked (index-linked gilts or NS&I Certificates if they return) are another low-risk avenue not covered in detail, but currently with inflation falling, their real yields are around 0% and breakevens imply ~3% RPI – not a straightforward win unless you expect inflation to overshoot expectations. Most retail investors right now prefer the high fixed rates on offer.
Credit risk: All options discussed are high credit quality. Avoid stretching for yield by going to high-yield bonds or peer-to-peer loans within the “low-risk” portion of your portfolio – those introduce substantial default risk and volatility. It’s better to accept ~4–5% from AA/AAA type instruments than 7–8% from junk bonds for a low-risk strategy.
FSCS rule change: As mentioned, the FSCS deposit protection is now £120,000[30] per institution (and £1.4m for temporary high balances from house sales, etc.[51]). This significantly increases the amount you can keep risk-free per bank.
If you have large cash sums, spread them across banks to utilize this limit (also remember many banks share banking licenses – e.g. HSBC and First Direct count as one).
This change (effective 1 Dec 2025) was implemented to boost depositor confidence after events in the banking sector, and it means most individuals’ deposits are fully insured[52].
Platforms and Fees: When using broker platforms for bond ETFs or funds, watch for any account fees or fund fees.
Holding money market funds or bond funds in an investing account might incur platform fees (~0.2–0.4% per year on some platforms like HL, unless in an ISA where it’s similar). Factor that into net returns.
NS&I and bank accounts are free to hold (no fees, aside from penalties for early withdrawal if applicable).
Noteworthy Risks/Factors: - Political/Fiscal events: e.g. a UK general election is due by 2025 (if not already occurred) – any surprising fiscal policy (large borrowing plans) could affect gilt yields. Conversely, improved public finances could tighten spreads.
Keep an eye on the UK’s credit rating or investor sentiment; though gilts are very unlikely to ever default, perceptions can move yields. - Global market volatility: If equity markets tumble or there’s a shock, high-quality bonds (gilts, Treasuries) often serve as safe havens, potentially boosting their prices (yields down).
This could benefit those holding bond funds. However, in an inflationary shock, bonds and equities could fall together (as in 2022). -
Liquidity considerations: If you think you might need cash unexpectedly, favor instruments with easy liquidity (money market funds, short bond funds, or at least laddered maturities) rather than locking all in a 5-year fix. A combination approach might be best.
In conclusion, UK investors in late 2025 have an enviable menu of low-risk fixed income choices yielding 4%+, after years of near-zero rates in the 2010s.
By mixing and matching – e.g. keeping some cash in a high-yield savings or MMF for flexibility, locking some in 1-2 year fixes or NS&I bonds for assured returns, and perhaps allocating a portion to short-term bond funds or gilts for potential capital gain – one can earn a solid, relatively safe return on capital.
Adding select global bonds can further enhance diversification, as long as currency risks are managed. Always align choices with your time horizon and liquidity needs.
And remember, while these instruments protect your nominal capital, inflation is the remaining sneaky risk – keep an eye on real returns and adjust as needed if the inflation outlook changes.
Sources:
[1] [2] UK inflation eases for first time in five months to 3.6% before crunch budget | Inflation | The Guardian
[4] United Kingdom 10-Year Bond Historical Data - Investing.com
[5] United Kingdom 2-Year Bond Historical Data - Investing.com
[19] What are the new NS&I interest rates? | Raisin UK
[30] [31] [51] PRA confirms FSCS deposit limit to be increased to £120,000 from 1 December | Bank of England
[46] Vanguard Global Bond Index Income Fund Price & Information
[47] Treasury Yields Snapshot: December 12, 2025 - dshort - Advisor Perspectives
[48] Market Yield on U.S. Treasury Securities at 10-Year Constant ...
[49] Germany 10-Year Bond Historical Data - Investing.com
[50] Germany Short Term Government Bond Yield, 2014 – 2025 - CEIC
[52] Bank savings are protected up to £120,000 under new UK rules
Disclaimer: This article is for educational purposes only and does not constitute financial advice or a recommendation to buy or sell any investment. Capital is at risk, returns are not guaranteed, and past performance is not a reliable indicator of future results. Tax treatment depends on individual circumstances and may change. Readers should seek advice from an FCA-authorised adviser before making investment decisions.
Alpesh Patel OBE
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