PIBs - income generation

DairyQueen

In the 1990s building society share flotations were in full swing. My dad and I bought a few PIBs to secure membership of specific societies. Our aim at the time was simply to gain membership of societies in order to receive the cash on offer when the society floated. Perhaps not the canniest of investment decisions at the time although we did indeed succeed in that objective.

20+ years later and dad and I still hold our PIBs. They have been great income earners (each has an annual return of between 8% & 9%) despite the suspension of payments for a couple of years during the financial crisis.

I am well aware that PIBs are relatively illiquid and that they carry some risk. However, they have proven to be such a sound income-generator that, as I approach retirement, I am considering diversifying more of my savings in their direction (perhaps 10%). I have no intention of selling out during my lifetime so their illiquidity isn't an issue for me.

Do any forum members have experience of PIB investment in the context of retirement income? If so, I would love to know what catalysed your thoughts in the PIB direction and what pros/cons you have experienced, or believe you may experience.

Thanks in advance for sharing.

Thrugelmir

With ultra low interest rates aren't the PIBS now selling at well above par value. You'll effectively be exchanging income now for a capital loss later. Nor is the income index linked.

DairyQueen

Yes, many are selling above par, and there is no way that the returns that I am currently enjoying will be available again anytime soon. However, the income is guaranteed and no less risky (in my opinion) than corporate bonds, and much better returns than cash and gilts. As a fixed interest investment PIBs seem to rate pretty well. More risky than gilts/treasury securities but higher returns. For example, Nationwide 6.875% has a current yield of 6.463%.

Perpetual bonds have no call date and that partly reduces the risk of capital loss, and it also keeps the price a little more stable. Of course there is a risk of a total loss of capital if the financial institution goes to the wall but I believe the chances of a repeat of 2008 in my lifetime are pretty small. I was lucky and my PIBs (just a few thousand, dangit) came through.

It's a niche market, and I certainly wouldn't commit more than 10% of my portfolio, but they seem a lot less risky than, say, P2P. The income (usually much higher than inflation) can be re-invested - exactly what I have been doing for the last 20 years - and, yes, if interest rates rise substantially then the returns will be correspondingly reduced.

Back in the 1990s I inadvertently chose a very good time to buy and the return has been spectacular compared to pretty much any other fixed interest investment over that timescale. I wish I had bought more.

One thing's for sure: Interest rates would have to rise considerably before, say, national savings/premium bonds could come close to matching the return currently available on PIBs

Alexland

DairyQueen wrote: »

Of course there is a risk of a total loss of capital if the financial institution goes to the wall but I believe the chances of a repeat of 2008 in my lifetime are pretty small.

Are you not planning to be with us long? Although an exact repeat of 2008 is unlikely a few well known financial institutions hitting the wall, for one reason or another, seems quite likely in my lifetime. Sure the regulator might be well placed to transfer the accounts to protect customer deposits but the share and bond holders might lose out.

Alex

Thrugelmir

DairyQueen wrote: »

Perpetual bonds have no call date and that partly reduces the risk of capital loss,

Capital loss is guaranteed as one day the stock will be sold. That's the bottom line.

If interest rates increase significantly then the loss will intensify in the years to come.

grey_gym_sock

well, i guess you didn't buy west brom PIBs. they suspended their interest payments, and haven't yet started paying again (and if they do restart, they might well be paying less than before, following some kind of restructuring). they're currently trading for about half their face value.

following new "bail in" laws introduced after the last financial crisis, PIBs (and other forms of subordinated debt in banks and building societies) are likely to fair rather worse in the next crisis. the bail-in provisions make it straightforward for the authorities to force losses, which could go as far as a complete wipe-out, on subordinated bondholders, if a bank/BS needs more capital. and they are sure to use these powers in full before they consider using any public money to bail out banks (again), because the latter would be politically very unpopular.

this is not to say that PIBs should not form a small part of an adventurous portfolio. but they are less safe than they used to be. and you should be looking into the finances of the bank/BS who issued the PIBs, because some are riskier than others.

grey_gym_sock

oh, and holders of what were britannia's PIBs lost some of their capital (i don't remember the exact details) after co-operative bank (which had taken over britannia) ran into trouble. this was more recent, and although the "bail in" powers weren't actually used, they probably influenced the outcome. i.e. PIBs holders "voluntarily" accepted some loss of capital, because it could easily have been worse under a "bail in".

DairyQueen

All good points (and thank you for your replies).