Investments for Income – Permanent Interest Bearing Shares (PIBS)

As the search for income investments continues, Investors and Financial Planners are turning away from traditional investment instruments in droves and instead opting for lesser known assets including a range of fixed income investment opportunities based on the acquisition of income generating properties. In this article we look back to financial markets and investigate one of the highest yielding income tools available for Investors seeking to retain some exposure to financial markets.

Permanent Interest Bearing Shares or PIBS are special shares issued by building societies seeking to raise capital from Investors in exchange for a fixed rate of interest. PIBS are listed and publicly traded on the London Stock Exchange. PIBS generate a fixed bi-annual (twice yearly) income by paying a dividend to shareholders, often referred to as a coupon, and the shares are not redeemable, but issuers do have the option to call them in at a fixed date in the future. If the issuer does not call the shares in then the rate of interest is set to a floating rate. It has historically been the case that issuers would always recall PIBS at the first option date, but current economic turmoil dictates that Investors can no longer rely on this being the case as it is not a set requirement for the issuer to do so.

There are a number of added risks for Investors considering PIBS as part of their income investment strategy; namely that holders of PIBS rank much lower than other creditors in the case of a winding up of the issuers. In fact, holders of PIBS rank behind all other parties that have effectively lent money to the issuer, including cash savers, bond holders and building society members. Any payment to holders of PIBS is limited to par, or 100p per share and as such, Investors may their entire holding or a substantial portion of it in the case of the building society failing. Also it is worth noting that the issuers have no responsibility to pay and arrears occurring from their failure to make an interest payment to PIBS investors. If an interest payment is not met, then the issuer does not have to make it up the next year.

In terms of tax; Investors must declare the income they receive from PIBS twice per year, but no stamp duty is payable on PIBS issued in the UK.

In the case of a building society converting to a Public Limited Company or PLC, the PIBS have been converted to another form of investment asset which offers much of the same set of characteristics as PIBS – that being perpetual subordinated bonds. The main difference however is that unlike with PIBS the new PLC has in some cases an obligation to make up any arrears in missed interest payments, although this is not always the case. Interestingly, interest payments are currently suspended for Bradford and Bingleys Perpetual Subordinated Bonds.

Further afield, many Investors are actively seeking to reduce their exposure to financial markets in general and are revisiting solid, tangible investments for income such as property that are unlikely to depreciate to nothing, and where income yields of up to 15% per annum are achievable in the right market.

David Garner is a Partner at boutique Alternative Investments firm DGC Asset Management – a Real Estate Investment Consultancy specialising in productive natural resource real estate and high yield property assets.