Follow the rules, and watch the charges

For those who have yet to use up their PEP allowance, Abigail Montrose gives a quick reminder of what you can and can't do
Click to follow
The Independent Culture
The countdown has begun. Investors have until 5 April to use up their 1997/8 PEP allowance: any investment after this will count as part of your 1998/9 PEP allowance.

For those who are still undecided about whether to invest in a PEP, here is a quick reminder of the PEP rules. A PEP is effectively a wrapper which can be placed around certain types of investments so that all income or gains from those investments are tax-free.

You can invest up to pounds 6,000 each tax year in a general PEP, and a further pounds 3,000 a year into a single company PEP. You must be 18 or over to invest in a PEP, and you can only invest through an approved PEP plan manager.

You can invest in one single company PEP and one general PEP each year. A general PEP can hold a variety of investments, including:

unit trusts;

investment trusts;

open-ended investment vehicles (better known as oeics);

individual stocks and shares;

corporate bonds.

These investments fall into two categories; "qualifying funds", where at least 50 per cent of the underlying assets are invested in the UK or the EU, and "non-qualifying funds". A non-qualifying fund may, for example, invest in the Far East. You can invest up to pounds 1,500 of your general PEP allowance in non-qualifying funds.

PEPs can be managed or self-select. Managed PEPs are by far the more popular, and are offered by most of the major investment management groups, including unit trust houses, investment trust houses, banks, building societies, stockbrokers and other investment companies.

Many managed PEPs invest in just one unit trust or investment trust. In other cases, the PEP manager will choose a selection of investments that he will package. In both instances the stock selection is made and managed by the PEP manager - you have no say.

With a self-select PEP, you will still need a manager to set up the plan for you and to deal with the Inland Revenue, but you can decide what investments go into your PEP, subject to the rules. These PEPs are usually only suitable for the more experienced investor.

Whichever type of scheme you go into, you will have to pay your PEP plan manager an annual fee. On a managed PEP the annual charge is typically between 1 and 2 per cent. On top of this there are charges on the underlying investments, such as the initial charges on a unit trust. Such is the competition in the PEP market, however, that often it is cheaper to invest in a unit trust via a PEP than to invest into the fund direct.

The annual charges on self-select PEPs tend to be lower, at around 0.5 per cent. This is because you will be making all the investment decisions, so the PEP manager only has to deal with the administration. These PEPs are typically offered by stockbrokers and other investments houses with a broking facility so that they can buy and sell investments on your behalf.

Not all self-select PEP managers will let you hold a complete range of investments in your PEP. Some, for example, will only let you hold individual shares. You should also look closely at the dealing charges, as these can mount up. If, for example, the minimum dealing charge was pounds 30 and you invested pounds 1,000 in the shares of six different companies, the charge you would pay is pounds 180.

You can only hold one company's shares in a single company PEP and the shares must be in a UK or EU listed company - investment trust shares are not acceptable. For most investors, investing in just one company's shares is a high-risk strategy, unless you already have a well-diversified portfolio. Single company PEPs are typically offered by stockbrokers and the stockbroking arms of the major banks and building societies.

Full details of all the PEPs currently available are contained in a number of guides. The Chase de Vere 1998 PEP Guide, for example, costs pounds 12.95 and is can be purchased by calling the company on 0800 526092.

Comments