Why Buy a 4.94% Gilt When a 3-Year Fixed Bond Pays 5.00% With £120,000 of FSCS Cover?

Start with the number the gilt case conveniently skips. The best fixed-rate bonds on sale in August 2026, per Moneyfacts, pay more than the 10-year gilt, which the Bank of England's daily curve puts at 4.94% on 13 August:

• 1-year fix: 4.85% AER (GB Bank)
• 2-year fix: 4.90% AER (Market Harborough Building Society)
• 3-year fix: 5.00% AER
• 5-year fix: 5.00% AER

A 3-year or 5-year bond pays more than the 10-year gilt, matures sooner, cannot fall in capital value, and is FSCS-protected up to £120,000. The gilt pays less, for longer, with price risk in between.

Normally this relationship runs the other way — lending to the government for ten years should pay a premium over a short bank deposit. That premium has vanished, and then some. When cash yields more than a gilt, the market is telling you something simple: the 'safe' lock is the one that pays you more to take less risk. You do not need a ten-year bet to beat 4.94%; you need a savings account.

The 10-year gilt yields 4.94% because you are lending for ten years. Ten years is a long time to be wrong. A quarter-point rise in Bank Rate knocks roughly 2% off a 10-year gilt's price; a half-point rise knocks roughly 4%. If the September hike lands and the market prices more to come, the gilt you 'locked' is down before your first coupon arrives.

The July vote was 6-3 to hold at 3.75% — but Megan Greene, Catherine Mann and Huw Pill voted to raise to 4.00%, and the Bank said it stands ready to raise if the Iran conflict feeds through to wages and prices. Our BoE rate-cycle explainer tracks the repricing: markets now put a one-in-four chance on a September hike. That is not a tail risk worth underwriting with ten years of duration for 4.94%.

A fixed cash bond has no duration. It cannot lose a penny of capital. The worst case is missing a further rise in rates — a far smaller error than losing 4% of your principal because you chased a 4.94% yield for a decade.

The gilt case leans on the CGT exemption: low-coupon gilts bought below par deliver most of their return as tax-free capital gain. True, and genuinely useful — for higher and additional-rate taxpayers with large balances outside an ISA.

For everyone else it is a non-event. A basic-rate taxpayer has a £1,000 Personal Savings Allowance, which shelters £20,000 of cash at 5.00% entirely. Even a higher-rate saver's £500 PSA covers £10,000 at 5.00% before a penny is taxed. Inside an ISA, where most UK savers should hold their first £20,000, cash interest and gilt returns are both tax-free — which means the gilt loses its only edge and still pays less than a 3-year fix.

The person who genuinely benefits from the gilt trick is narrow: an additional-rate taxpayer, ISA already maxed, willing to hold a specific low-coupon gilt to maturity for a decade. That is not most savers. That is a financial-planner hypothetical dressed up as universal advice. Strip away the tax wrapper question and the decision reverts to the plain numbers: 4.94% locked for ten years with price risk, or 5.00% locked for three with none. The tax trick only rescues the gilt for a thin band of high earners.

Here is the question the fixed-gilt story cannot answer: what happens to your money if the Bank actually hikes on 17 September?

Easy-access rates follow Bank Rate up. The best no-bonus account already pays 4.52% (cahoot), and headline rates hit 5.00% with short bonus periods. If Bank Rate goes to 4.00%, those rates rise again — and you can move to them. A fixed-rate bond at 4.85% to 5.00% locks the return with FSCS cover. A 10-year gilt locks you in at 4.94% while its price falls.

The Best Savings Accounts guide and Fixed Rate Bonds guide show the play: a ladder across easy-access, a one-year fix and a three-year fix keeps you earning whatever the Bank does next. The /savings hub tracks the best rates as they move.

You keep the option. The gilt trade asks you to give up the option for less yield and more risk. In a market where three MPC members just voted to hike, optionality is not a luxury — it is the entire game.

Put £50,000 through both outcomes and see where the loss lands.

The gilt that goes wrong. £50,000 in a 10-year gilt at 4.94%. If the September hike arrives and the yield climbs half a point, the market value of your gilt falls roughly 4% — about £2,000 — before you have collected a single full year of interest. Hold to maturity and you get your capital back, but you have also locked £50,000 at 4.94% for a decade while easy-access cash reprices upward around you.

The cash that 'goes wrong'. £50,000 in a 3-year fix at 5.00%. The worst realistic outcome is that the Bank cuts and you could have earned a touch more elsewhere — but you still earn £2,500 a year, the capital is FSCS-protected, and you cannot lose a penny of principal. Your 'mistake' is measured in forgone basis points, not thousands of pounds of capital.

Now add tax honestly. For a basic-rate taxpayer with the PSA intact, both are effectively tax-free — so the 5.00% cash fix simply wins on yield, and it is not close. For an additional-rate taxpayer, the low-coupon gilt's CGT exemption narrows the gap — but only if they hold a specific gilt for a decade. Most savers are in the first group, not the second.

Be fair to the gilts. If you are an additional-rate taxpayer with £100,000 outside an ISA, a low-coupon gilt's CGT-free return genuinely beats cash after tax — the How to Buy UK Gilts guide walks through that maths honestly, grounded in section 115 of TCGA 1992. And if the Bank cuts instead of hikes, the gilt's price rises and you look smart.

But 'if the Bank cuts' is the exact scenario the market has abandoned. The rate narrative flipped in a week: the debate went from when cuts resume to how high the next move goes. Buying a gilt now means betting that three MPC hawks are wrong, that inflation reverses, and that ten years of duration risk is worth a yield below a 3-year fixed bond.

For the other side in full, read why the 4.94% gilt's after-tax maths beats cash for higher-rate savers. Then ask which side describes your actual balance, your actual tax band, and your actual need for the money.