Gilts are gilt edged bonds issued by the UK government to companies and local authorities looking for a reasonably safe investment.

Index linked gilts are different to ordinary gilts because the twice annual interest payments and the remaining principle are both linked to the UK General Retail Price Index, known also as the RPI.

The way in which the amount of cash is generated by assessing any further inflation from the purchase date of the index linked gilts, however, slightly different methods of calculation are used for gilts purchased on different dates.

The gilts have what are known as different indexation lags i.e. the time lag between when the gilt was purchased and when the cash is index linked. For gilts that were purchased prior to 2005 the indexation lag is eight months, but gilts that were purchased after 2005 have an indexation lag of three months.

The interest on each payment of interest is the result of using information in the bond's title e.g. 2,5% Index Linked Treasury Stock and adjusting it to take account of any changes in the Retail Price Index. More detailed information on index linked gilts and their calculation can be found on the government's UK Debt Management Office website.