What are bonds and how do they work?

Bonds are essentially loans you make to a government or company in exchange for regular interest payments — and when the loan matures, you get a known sum back. They're typically considered lower-risk than shares, which makes them a popular component of pensions and diversified portfolios. UK government bonds, known as gilts, come with the added advantage of being largely tax-free on any capital gains, making them particularly interesting for higher rate taxpayers. The trade-off is that lower risk usually means lower returns — but for investors who want more stability and predictability, bonds can play a really useful role alongside shares.