Gilts, money market funds and cash-like investing

The gap between a savings account and the stock market

The emergency fund guide covers cash you keep in deposit accounts. This guide covers cash’s investment-shaped cousins — money market funds and individual gilts — and the three situations where they beat a savings account:

• Cash inside a wrapper. An ISA, LISA or SIPP can’t hold a best-buy savings account, but it can hold a money market fund paying close to Bank rate.
• Balances above the FSCS limit. Deposits are protected to £120,000 per banking licence; gilts are a direct claim on the UK government with no ceiling.
• Taxable interest at 40% or 45%. Once the personal savings allowance (£500 at higher rate, £0 at additional rate) is gone, a 4.5% savings account nets a higher-rate taxpayer 2.7%. Low-coupon gilts fix this — legally, simply, and better than almost nobody realises.

None of this replaces the emergency fund itself. The front line stays in genuinely instant-access cash; this is for the money behind it with a job and a date.

Money market funds — the cash of the investment world

A money market fund (MMF) holds very short-term, very high-quality lending — overnight deposits with major banks, Treasury bills, near-maturity bonds — and its yield tracks the Bank of England rate closely, minus a small fee (typically 0.1–0.2%). When rates move, the fund’s yield follows within days. There’s no fixed term, no teaser rate and no loyalty penalty.

Where they shine is inside wrappers: a house-deposit LISA that mustn’t ride the stock market, the cash buffer in a drawdown SIPP, or ISA money waiting to be invested — all earning near Bank rate while platform cash accounts often pay less.

The honest caveats: an MMF is an investment, not a deposit. There’s no FSCS deposit protection (the separate £85,000 investment cover applies only if the platform or manager fails, not if the fund falls). Yields aren’t guaranteed, and getting money out means a sale plus settlement — a few working days, not an instant transfer. In a GIA, MMF interest is taxed as savings income even when the fund retains it — at which point a higher-rate taxpayer should keep reading.

How a gilt works

A gilt is a loan to the UK government. Each one pays a fixed coupon (interest) twice a year and repays exactly £100 per £100 nominal on a known maturity date. The market price wobbles in between — down when interest rates rise, up when they fall — but the endgame never moves: hold to maturity and your total return is locked in on the day you buy. That locked-in figure is the yield to maturity, and it’s the only number that matters when comparing gilts; the coupon alone tells you almost nothing.

Two very different ways to own them:

• Individual gilts held to maturity behave like a fixed-term deposit with a government guarantee: known date, known payout.
• Gilt funds never mature. They perpetually hold a rolling basket, so they’re a permanent bet on interest rates — long-dated gilt funds lost 30–40% in 2022 when rates jumped. Fine as a deliberate portfolio holding; nothing whatsoever like cash.

For cash-like purposes, this guide means the first kind: short-dated individual gilts, bought with a redemption date matched to when you need the money.

The low-coupon edge

Here is the genuinely underexplained part. Gilts are exempt from capital gains tax — any profit between what you pay and the £100 redemption is entirely tax-free. Only the coupon is taxed (as savings income). So two gilts with the same yield to maturity can have wildly different after-tax returns depending on how that yield is split between coupon and capital uplift.

The gilts issued in the near-zero-rate era of 2020–21 carry coupons of 0.125–0.5%. Because rates rose afterwards, they now trade well below £100, and almost their entire return is the tax-free climb back to par. Example: a gilt with a 0.125% coupon and two years to run, priced around £92.50, yields roughly 4% a year — of which only the 0.125% coupon is taxable. A higher-rate taxpayer keeps about 3.95%.

What a savings account would need to pay, gross, to match that ~4% net:

(Assuming your personal savings allowance is already used — check where you sit with the marginal tax calculator.) No savings account pays 6.6%. For a higher-rate taxpayer with a known-date lump sum outside wrappers — next year’s tax bill, a house move, school fees — this is about as close to a free lunch as UK personal finance offers.

The fine print, honestly:

• This only matters unwrapped. Inside an ISA or SIPP everything is tax-free anyway — just buy whatever yields most.
• The mirror image is a trap. A high-coupon gilt priced above £100 is the same trade backwards: heavily taxed income plus a guaranteed capital loss you can’t offset (gilt losses aren’t allowable, just as gains aren’t taxable). Never hold one of those unwrapped.
• Compare net yields, not gross. For a basic-rate taxpayer with personal savings allowance to spare, a best-buy fixed-term deposit often still wins.
• The coupon is still taxable, and if you hold more than £5,000 nominal of securities, the accrued income scheme adjusts the interest you’re taxed on when buying or selling between coupon dates — the split appears on your contract note.
• Rules can change. The CGT exemption for gilts is decades old and politically entrenched, but it is a line in a tax act, not a law of nature.

Buying gilts in practice

Most large UK platforms deal in gilts — some online, some only by phone (at phone-dealing rates, so check charges). You’ll see two prices: the clean price quoted, and the dirty price you actually pay, which adds the interest accrued since the last coupon date. It looks alarming on the contract note; it’s just buying the seller’s earned-but-unpaid interest, which comes back to you at the next coupon.

Practical points:

• Match maturity to need, then forget it. At redemption the cash simply lands in your account — no selling, no spread, no timing decision. Money needed across several years can use a ladder: one gilt maturing each year.
• Selling early reintroduces price risk. The locked-in return only applies at maturity; in between, the price is whatever the market says.
• Name your gilt precisely. Low-coupon issues such as the 0.125% Treasury Gilt 2028 (TN28) or the 0.25% Treasury Gilt 2031 (TG31) sit alongside high-coupon siblings maturing the same year — the coupon is the whole point, so check it, and check the current yield to maturity before buying rather than trusting any article’s snapshot (including this one).
• Treasury bills are not gilts for tax. T-bills are sold at a discount and the discount is taxed as income — the low-coupon trick does not work with them.

Which cash-like home, when

The mistakes

Buying a gilt fund for a 2028 house deposit because “gilts are safe” (the fund never matures; the price in 2028 is anyone’s guess). Judging a gilt by its coupon instead of its yield to maturity. Carefully executing the low-coupon trade inside an ISA, where it saves nothing. Holding a premium-priced high-coupon gilt unwrapped, which is the trick in reverse. And leaving six figures in one bank because moving it felt like effort — the one risk on this page with a genuinely bad historical track record.

The one-line summary

Inside a wrapper, park cash in a money market fund and move on; outside one, a higher-rate taxpayer with known-date money should hold a low-coupon gilt to maturity — most of the return arrives as tax-free capital gain, and no savings account can compete with that after tax.

Related guides & tools

• Emergency funds and where to keep cash — the deposit-account side of the cash question
• Investing outside ISAs — the GIA tax rules this guide exploits
• ISA investing — if the wrapper isn’t full yet, none of this is your problem
• Retirement drawdown — where the MMF cash buffer earns its keep
• Marginal tax calculator — find the rate that decides which column you’re in

Last reviewed: August 2026.