Cash, gilts and equities each play a distinct role in a portfolio. Equities offer the highest long-term returns but carry greater risk. Gilts provide tax-efficient income once allowances are used, while cash offers security and liquidity. Hargreaves Lansdown explains that holding some cash supports diversification and stability, though gilts and equities typically deliver stronger long-term growth.
Mark Hicks, head of Active Savings, Hargreaves Lansdown:
“Having a proportion of assets invested in cash is a key part of overall portfolio diversification. Cash investing provides immediate liquidity and security, with deposits guaranteed by the FSCS up to £85,000 at each individual financial institution. Through savings platforms, such as Active Savings, you can spread deposits across multiple banks and get FSCS protection on a much higher amount. It is valuable for short-term needs and risk-averse individuals, or for those saving for a specific purpose, such as a house purchase or a holiday. However, being a low-risk product, it typically underperforms against other asset classes over time. Gilts and equities, especially over the long term due to inflation and lower returns, will typically have higher returns – although, at present, you can earn more than inflation if you search around for the best savings rates. With fixed rates still offering above inflation and base rate with returns up to 4.5%, it is still a very attractive asset class at present.”
Who cash investing is appropriate for
- Individuals with very low risk tolerance or those requiring quick access to funds, such as rainy-day or emergency savings.
- People with short investment horizons (less than 1–3 years).
- Those unable or unwilling to bear any capital or market risk.
Where cash investing has advantages over gilts and equities
- Provides certainty: The nominal amount does not fall, unlike gilts or equities, which carry price fluctuation and capital risk.
- Instant access: Cash is immediately available, making it superior for emergencies or short-term spending needs.
- Zero capital risk in insured accounts, whereas gilts (if sold before maturity) and equities may lose value.
INVESTING IN GILTS
Hal Cook, senior investment analyst, Hargreaves Lansdown:
“Investing in gilts directly offers a few benefits as part of a portfolio. They give investors the ability to lend money to the UK government, who are a low-risk option when it comes to people to lend your money to. The potential to lose money is low if you can hold the gilt until maturity, particularly over the short to medium-term. Some gilts offer annual interest payments of as much as 5%, which can be useful for investors looking for income. The performance of gilts over the short-term is often different to shares, especially during periods of market stress. This can add diversification to an investment portfolio.
Who investing in gilts work well for
- Income investors. For those who want a secure income, the explanation is relatively simple: there are gilts available with lots of different lengths of time until they mature, which offer fixed annual interest payments. This can be very appealing for investors who need an income as the fixed nature of the interest payments makes planning easier. For example, dividends paid by company shares can change and have the potential to be reduced. Compared to savings accounts, it’s possible to invest in gilts for much longer periods of time and lock in the annual interest payments.
- 0% capital gains tax investors. The other group of people who gilts appeal to are those looking to take advantage of the current tax benefit from gilts as they do not attract capital gains tax. While there are gilts with coupons of 4-5% available, there are some others available where the coupons are much lower. Where the coupon is low, a greater proportion of the overall return comes from the difference between the price paid for the gilt and the maturity value.
Given the tax benefit for higher income rate taxpayers, it’s no surprise that HL has seen an increase in the number of clients buying gilts with short to medium-term maturity dates over recent years. So far in 2025, we’ve seen a 19% increase in the number of clients buying gilts that mature within the next 5 years compared to the same period in 2024. We’ve also seen an 11% increase in the number of buy trades for those gilts.
Some caveats: investors should consider whether they have made full use of their tax allowances and tax efficient investment wrappers such as ISAs or pensions. Tax rules can change. The 0% capital gains tax rate only applies to gilts bought directly and not to gilts held via investment funds.
What are the things you need to consider before you start
- Whether you are investing for income or capital gains.
- Investors should also think about the different tax efficient wrappers available to them and whether these suit their investment needs better, compared to buying gilts directly.
Who shouldn’t consider gilts
- Investors who might need to sell the gilts before their maturity date. While the coupon and maturity payments are fixed, gilt prices change daily and can go down as well as up. Investors who sell the gilt before it matures could get back less than they invested.
- Investors looking for high rates of return or those investing for the long term who are looking purely for capital growth. It’s likely that other assets would better suit these investors.”
INVESTING IN EQUITIES
Emma Wall, Chief Investment Strategist, Hargreaves Lansdown:
“Of the three – equities are the highest risk asset, but they also offer the highest potential for reward. Unlike cash and gilts, equities offer investors three opportunities for returns – income, income growth and capital growth.
Dividends are typically paid out by companies with dependable revenue streams, either because of the nature of their business – subscriptions, annualised fees, insurance, servicing – or what they sell – consumer staples, essential goods, utilities, energy and pharmaceuticals. You can see these patterns in the 15 companies that have paid dividends for more than 100 years, Proctor & Gamble for example have paid dividends since 1891 and sell toothpaste and washing powder, PPG industries – paying dividends since 1899 – sells paint and glass. These companies also often have the ability to raise prices in line with inflation because of the essential nature of their goods and services, offering investors inflation hedging in their portfolio – unlike cash and gilts.
With gilts, the coupon is fixed, and the same is true of fixed rate cash savings accounts. But with equities, a good quality cash generative company has the ability to increase dividend payouts year after year. This is called income growth. There are many companies that have consistently paid out increasing dividends for decades.
However, it is worth nothing that unlike gilts or fixed rate cash savings dividend payments can go down as well as up, and in some cases be paused altogether, in times of either market or economic stress such as banking stocks during the pandemic.
As well as the potential for dividends and dividend growth to boost total returns, equities also offer potential for capital growth. A well-run company will be able to generate greater revenues and profits, which in turn increases its market value. As a shareholder your slice of that company will also then increase in value. This also of course can go the other way – poorly run companies, those that the market has overvalued, or external factors such as regulation, politics or competition can cause equity values to fall.
So, what does this mean for your money? Let’s assume 5% share price growth – typical blended large caps return over the past 10 years. And a 4% dividend yield on top of that. Assuming you don’t get the dividend payment in the first year, in case of purchase timing, that means 5% in year one, and 9% annualised thereafter – leaving you with £22,805 after 10 years. Key to maximising those returns? Tax efficient investing. Hold your portfolio in an ISA and you don’t need to pay capital gains or income tax.”
Who are equities suitable for?
- Investors with a long-term investment horizon who are comfortable with some volatility risk.
- Investors who take advantage of tax wrappers such as ISAs and SIPPS will be able to maximise returns in their portfolio
Where equities have an advantage over gilts and cash?
- Three ways to generate returns; income, income growth and capital grow.
- Highest returns potential of the three assets.
- Most suitable for long term financial goals.
- Certain sectors offer potential for inflation hedging
Comparison tables: cash, gilts, and equities
| PROS | CONS | |
| Cash Investing | Offers instant access and high liquidity for emergency funds or short-term goals.Low risk, particularly when deposited in insured accounts (such as those protected by the FSCS up to £85,000).Does not fluctuate in nominal value, so it is stable over short periods. | Cash can fail to keep up with inflation across most long periods, typically eroding real purchasing powerLower returns compared to equities in long-term scenarios.Interest rates and returns are variable and usually dictated by central bank policy and commercial lenders, with future cuts posing risks to savers. |
| Gilts | Potential to lock in higher rates of interest than cash over the medium to long-term.Highly liquid0% capital gains tax applies when bought directly | Investors could lose money if they have to sell the gilts before their maturity dateInflation can reduce the value of the fixed returns over the long-termExpected lower returns than equities over the long-term |
| Equities | Three ways to generate returns; income, income growth and capital growthHighest returns potential of the three assets Most suitable for long term financial goals Certain sectors offer potential for inflation hedging | No guarantee of returns, and investors could lose money if share price fallsReturns are more volatile, which could lead to poor outcomes if investor not comfortable with risk |
| Feature | Cash Investing | Gilts | Equities |
| Capital Risk | Very low | Low if held to maturity | Higher |
| Return Potential | Low | Moderate | Highest over long term |
| Volatility | Minimal | Low to medium | Med to high |
| Suitable Horizon | Short-term | Short to Medium-term | Long-term |
| Current Returns/Yield | 4.5% | 4 to 4.25% | 5% annualised growth4% current average yield of the UK Equity Income fund sector |
Gilts explainer
What is a gilt?
A gilt is a UK Government bond. When you buy one, you’re lending money to the UK government. In return, you get interest payments (called coupons) and a lump sum when the bond matures (ends).
UK Government bonds are typically viewed as one of the ‘safest’ forms of bond. That’s because it’s unlikely that the UK government will not pay its debts.
Jargon busting:
- Coupon – The rate at which the UK Government will pay interest.
Each gilt has a rate of interest of “X”% per year called a coupon, based on the maturity value of £100. It’s generally paid annually or semi-annually. For example, if you bought one unit of a gilt that paid a coupon of 5%, you’d get £5 every year.
- Maturity Date – the date loan will be repaid.
A date is set for the end of the gilt, known as the maturity or redemption date. Coupon payments stop on this date and the UK Government pays the owner of the gilt the maturity value.
- Maturity Value – the amount paid back by the UK Government when the gilt matures.
This is usually £100 per gilt (but not always) and is sometimes referred to as the ‘par’ or ‘face’ value.
