The single most popular investment in the UK as the ISA deadline approaches is a not a fund or a single stock but a gilt, according to Interactive Investor.
UK gilts, or Government bonds, have remained the most popular asset for the 10th consecutive month, even as declining yields mean the returns are not as strong as they may have been in the second half of 2023.
The TN25 gilt, due in January 2025, was the top asset in terms of net flows, while T26 and TG24 were not far behind.
The top gilts beat out all of the most popular funds in the country, whether that’s active funds from stock pickers like Terry Smith or passive funds tracking indices like Wall Street’s S&P 500. They also beat all of the most popular individual shares, from perennial widely held British investments like Lloyds to recently popular picks like Nvidia.
For much of the post-global financial crisis era, gilts were popular only with those seeking ultra-safe assets, as low interest rates meant returns were minimal. But stronger returns have turned them into a more mainstream investment.
Gilts also offer tax benefits compared to shares, which make them attractive to savers who have maxed out their ISA allowance. The Treasury-backed assets have a principal amount and a coupon - which acts as interest. They are then traded on the open market, with recent increases in interest rates prompting investors to sell them for significantly less than the value of the principal.
The coupon is taxed but differences between the principal and the open-market price are not. This means that gilts issued at a time of low rates are very tax efficient, as most of the gain realised by savers is due to the principal being higher than the market price.
For those who have not yet maxed out their ISA allowance, gilts can still be included in an investment ISA. All types of assets included in an ISA would be subject to the tax relief that applies under the allowance.
The “yield” of a gilt is the effective interest rate when both the coupon and the difference between the principal and market price price are taken into account.
Sam Benstead, fixed income specialist at interactive investor, says: “It may surprise many to see that it is not a popular fund, investment trust, ETF, or share that has been attracting the most cash since last summer. But it makes a lot of sense that TN25, alongside other gilts maturing soon, have seen a huge amount of cash flow into them.
“First, gilt yields hit a recent peak last summer, at around 5%, causing many investors who had steered clear of bonds to pay attention. That kickstarted flows into the asset class.
“Combined with tax benefits due to low coupons, there were and still are good low-risk returns on offer for investors who have maxed out their ISAs and have cash they want to lock away for relatively short periods.”
The deadline for savers to use their tax-free ISA allowance is 5 April.
