If you are prepared to take a bit more risk but like the security of fixed-interest returns, you can put the whole 2012-13 Isa allowance of £11,280 — and existing Isas both cash and share based — into something like a corporate bond fund or individual preference shares, bonds or PIBS (permanent interest-bearing shares) issued by building societies, banks and other big institutions and companies.
Some of these are offering returns of more than seven per cent and at that rate if you don’t withdraw the interest your money doubles in 10 years. And, of course, the return is tax free — good for those who need to supplement their pension income.
Bond prices don’t react like ordinary shares but are affected by interest rate changes. They are bought and sold on the stock exchange, paying a fixed half-yearly dividend.
The risk is that when interest rates start to rise, the price of the bonds will fall so that the yield (or return) falls into line with interest rates obtainable elsewhere. But if you are a long term holder of these investments you can probably ride out the interest rate cycle, earn a handsome return on an annual basis, and still get your money back or even make a profit when you sell if you get the timing right.
For example, you can buy Nationwide 6.25 per cent PIBs for £87 for each £100 of stock which gives you a gross annual return of 7.18 per cent. The bonds may be repaid at face value of £100 in 2024 which gives you a yield to maturity of 7.9 per cent taking into account the built-in profit of £13 for each £100 invested. But there is no obligation for Nationwide to do so. If the bonds are not ‘called’ they will continue to pay a return currently around 4.06 per cent calculated at 2.58 per cent over whatever five year government stocks are paying at the time.