YOUR MONEY: Eternally yours: a 9% rate from the building society

When interest is flagging, Pibs can breathe new life into your savings account.
Would you like a regular income of 9 per cent or more, fixed at this level forever? If you invest in permanent interest-bearing shares (Pibs), you will get exactly that. An added bonus is that they are issued by building societies, which makes Pibs a relatively secure investment.

Building societies issue them as a way of raising extra funds. They work in the same way as government-issued bonds, known as gilts: you hand over capital, and get a regular income in exchange. Government issues are very secure because they are backed by the Treasury but if you are prepared to take on a little more risk Pibs offer a higher income than most gilts and there are no redemption dates.

You will always be paid interest twice a year at the rate offered when you buy the shares. If you are a basic rate taxpayer, there is nothing extra to pay as 20 per cent tax is automatically deducted before interest reaches you. Non-taxpayers can reclaim this on their tax returns.

Building societies have only been able to issue these securities since 1991. There are 15 traded issues from 11 building societies and only four or five market-making firms who run Pibs "books". They are not really aimed at the private investor. But an increasing number of people have realised that they offer an excellent way to guarantee a decent income at a time of low interest rates.

Mark Dampier, an independent financial adviser at Churchill Investments in Avon, says that they are one of the most attractive fixed-interest investments but warns there is a downside that could catch out the unprepared: "The most important thing is not to confuse Pibs with an ordinary building society investment. Because they are a fixed-interest investment the capital value of your shares will drop as interest rates go up. There is a general feeling that interest rates will go up and they could be 7.5 to 8 per cent by the end of next year."

When rates rise income stays the same, and if you can hang on to your shares until interest rates drop again, you should be able to avoid selling at a loss - and even make a profit. There is no capital gains tax (CGT) liability when you sell at a profit.

If you want to buy or sell them, you will find that prices vary from day to day and between the market-makers, although you can get a general idea of current prices and the interest paid by looking at a weekly list published in the Financial Times on Saturdays (see box for this week's rates).

Private investors have to go through stock brokers to buy Pibs and you can keep costs down by going to a discount execution-only broker, although not all will deal in them. City Deal offers a good-value service, buying and selling them on behalf of individual investors at normal dealing rates (which start at pounds 9 over the phone and pounds 5 by post).

Stephen Pinner, the managing director at City Deal, says: "These shares have become more popular recently as interest rates have not been very good. The market is more active now than I've known it before."

Most Pibs issues have a minimum investment level of pounds 1,000 or pounds 10,000. If you want Halifax Pibs, you will have to put in at least pounds 50,000. Pibs investors are eligible for cash or share bonuses when building societies are taken over or become banks. The same rules apply for Pibs holders as for ordinary saving members: to get a bonus you have to have owned the Pibs on the qualifying date announced by the society. So only those Halifax Pibs holders who owned the shares on 25 November, 1994 will get a bonus.

If you are looking for possible future bonuses, you only need pounds 1,000 to buy Birmingham Midshires Pibs, hotly tipped as a possible takeover target.

Once a building society becomes a bank Pibs are transferred to a new fund set up under the same conditions, so investors will not notice any changes. They are then ready to be traded on the stock market.

If you have a lump sum to invest and want to get a better spread than might be available if you buy direct, Johnson Fry securities has a Personal Pibs Portfolio. The minimum investment is pounds 20,000 and the gross yield is 9 per cent a year. Marketing director Alastair Altham says: "You could put all your money into one PIBS issue but by getting a spread you get a lower risk."

The Johnson Fry portfolio pays an income quarterly. There is a 4 per cent commission when you invest and nothing more to pay for two years. After that you will be charged an annual management fee of pounds 80 plus VAT a year.

Pibs offer a good deal for income-seekers but there are risks. The biggest stumbling block for cautious investors is likely to be the threat to capital value when interest rates rise. Moreover, in the unlikely event of a building society being wound up, Pibs investors will be last in the queue for compensation, behind all other creditors.

Mr Dampier is confident that Pibs are a good option for some investors: "I wouldn't say they are fantastic value at the moment but the price of Pibs isn't as high as some other fixed-interest investments. They definitely have their place as an income booster but you have to see Pibs as a very long-term investment."

City Deal: 01708 742288; Johnson Fry Personal PIBS Portfolio: 0171 451 1236.

Best-buy Pibs

The following PIBS have a minimum pounds 1,000 investment. The PIBS were originally issued at 100p each.

Price per share Gross yield

Birmingham Midshires 101p 9.232%

Bristol and West 143p 9.336%

Britannia 139p 9.347%

Coventry 13lp 9.211%

Leeds & Holbeck 145p 9.222%

Newcastle 118p 9.050%

Newcastle 137p 9.212%

Northern Rock 139p 9.020%

Skipton: 139p 9.219%

All prices to nearest 1p. Prices as at 23/10/96

Source: ABN Amro Hoare Govett