Question
What do you think of PIBS?
Our Financial Adviser has suggested Zopa but not mentioned PIBS which seem a good option for retirement income provided you do not put too much into one Building Society. I would really appreciate your thoughts.Answer
Permanent interest bearing shares (PIBS) are similar to corporate bonds, i.e. they're long term IOUs that pay a fixed rate of interest. The main differences are that PIBs are issued by building societies and rarely have a repayment date.
Interest is paid twice yearly (called a ‘coupon') and taxable, although it's tax-free when the PIBS are held within an individual savings account (ISA). Either way, capital gains are exempt from tax.
Although PIBs have historically been viewed as quite safe, the recent banking crisis clearly highlighted the risks. If a building society becomes insolvent then PIB holders sit at the bottom of the pile in terms of getting their money back (although above shareholders if the society has 'demutualised'). And if you do lose money it won't be covered by the Financial Services Compensation Scheme).
Even if a building society doesn't go bust, it might still suspend paying interest on PIBS if it hits financial trouble – as Northern Rock did in August 2009. And missed payments are usually gone for good, as the society isn't obliged to roll these up into future payments.
The other risk, as with all fixed interest, is that their value could fall if interest rates and/or inflation rise. While I think interest rate rises over the next year or two will be small, if any, they are likely to rise medium term. Inflation has recently risen and while likely to be fairly stable going forwards it's very difficult to predict.
Bearing in mind these potential risks, are current yields attractive?
You can view a full list of PIB yields from 22 January 2010 on the FT website here.
[Note: PIBs don't have redemption yields (which include any capital gain or loss when the PIB is repaid) as such because there's no fixed redemption date. However, some PIBS give the society the option to redeem at a certain ‘call' date, in which case a yield ‘to call' may be shown.]
Nationwide PIBS, probably viewed as one of the safer options, have ‘running' yields (i.e. income/price) of around 7% gross.
This compares to 20 year gilt yields of about 4.4%, so in the case of Nationwide you're getting an extra 2.5% or so interest a year to compensate for the additional risk over lending to the UK Government.
Building societies that are perceived to be higher risk unsurprisingly yield more. For example, Kent Reliance PIBs have running yields of around 9-10% while First Active PIBS are yielding 12.5%.
When building societies do get into financial difficulty they're usually swallowed up by a larger society rather than being left to collapse, so on this basis you might view PIBS as being a pretty good bet. However, there's no guarantee this will happen and rising interest rates and/or inflation could cause prices to fall over coming years.
A final consideration is that PIBS are not always easy to trade. This means you might find it difficult to buy and sell and could face an unappealing margin between buying and selling prices (bid/offer spread).
Overall I think current PIB yields fairly reflect the risks involved. So while PIBs aren't offering any bargains, they don't look overpriced either.
If you're looking for a long term income then by all means consider PIBS, but do appreciate the possible risks and test the waters with a stockbroker to see whether there's a market for the particular PIBS(s) you want to buy.
As an aside, Zopa is an interesting concept – basically bringing private lenders and borrowers together. The idea is that borrowers can get a better deal versus a bank loan and lenders earn more than they'd get in a savings account. Bad debts, i.e. borrowers not paying you back, are an obvious risk in the current climate, although the risks are reduced by your money being spread across 50 borrowers or more. The rates don't always work out as they'll usually favour either borrower or lender depending on demand, but it's worth a look.
What do you think of PIBS?
Our Financial Adviser has suggested Zopa but not mentioned PIBS which seem a good option for retirement income provided you do not put too much into one Building Society. I would really appreciate your thoughts.Answer
Permanent interest bearing shares (PIBS) are similar to corporate bonds, i.e. they're long term IOUs that pay a fixed rate of interest. The main differences are that PIBs are issued by building societies and rarely have a repayment date.
Interest is paid twice yearly (called a ‘coupon') and taxable, although it's tax-free when the PIBS are held within an individual savings account (ISA). Either way, capital gains are exempt from tax.
Although PIBs have historically been viewed as quite safe, the recent banking crisis clearly highlighted the risks. If a building society becomes insolvent then PIB holders sit at the bottom of the pile in terms of getting their money back (although above shareholders if the society has 'demutualised'). And if you do lose money it won't be covered by the Financial Services Compensation Scheme).
Even if a building society doesn't go bust, it might still suspend paying interest on PIBS if it hits financial trouble – as Northern Rock did in August 2009. And missed payments are usually gone for good, as the society isn't obliged to roll these up into future payments.
The other risk, as with all fixed interest, is that their value could fall if interest rates and/or inflation rise. While I think interest rate rises over the next year or two will be small, if any, they are likely to rise medium term. Inflation has recently risen and while likely to be fairly stable going forwards it's very difficult to predict.
Bearing in mind these potential risks, are current yields attractive?
You can view a full list of PIB yields from 22 January 2010 on the FT website here.
[Note: PIBs don't have redemption yields (which include any capital gain or loss when the PIB is repaid) as such because there's no fixed redemption date. However, some PIBS give the society the option to redeem at a certain ‘call' date, in which case a yield ‘to call' may be shown.]
Nationwide PIBS, probably viewed as one of the safer options, have ‘running' yields (i.e. income/price) of around 7% gross.
This compares to 20 year gilt yields of about 4.4%, so in the case of Nationwide you're getting an extra 2.5% or so interest a year to compensate for the additional risk over lending to the UK Government.
Building societies that are perceived to be higher risk unsurprisingly yield more. For example, Kent Reliance PIBs have running yields of around 9-10% while First Active PIBS are yielding 12.5%.
When building societies do get into financial difficulty they're usually swallowed up by a larger society rather than being left to collapse, so on this basis you might view PIBS as being a pretty good bet. However, there's no guarantee this will happen and rising interest rates and/or inflation could cause prices to fall over coming years.
A final consideration is that PIBS are not always easy to trade. This means you might find it difficult to buy and sell and could face an unappealing margin between buying and selling prices (bid/offer spread).
Overall I think current PIB yields fairly reflect the risks involved. So while PIBs aren't offering any bargains, they don't look overpriced either.
If you're looking for a long term income then by all means consider PIBS, but do appreciate the possible risks and test the waters with a stockbroker to see whether there's a market for the particular PIBS(s) you want to buy.
As an aside, Zopa is an interesting concept – basically bringing private lenders and borrowers together. The idea is that borrowers can get a better deal versus a bank loan and lenders earn more than they'd get in a savings account. Bad debts, i.e. borrowers not paying you back, are an obvious risk in the current climate, although the risks are reduced by your money being spread across 50 borrowers or more. The rates don't always work out as they'll usually favour either borrower or lender depending on demand, but it's worth a look.
Read this Q and A at http://www.candidmoney.com/questions/question126.aspx
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