Midweek Money: Picking the perfect PEP

The Fixers: Tim Cockerill
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The Independent Culture
REDUCING TAX liability has to be one of the main aims for investors. Unfortunately, there are few options available these days. The two most popular are the Tessa and the "general" PEP, into which pounds 6,000 can go each year.

However, until April 1999 you can also invest pounds 3,000 into the single company PEP. I think this is a great idea, but is it suitable for many investors? This situation was highlighted a couple of days ago when Mr Melton called to discuss one.

"I am going to put Halifax shares in a single company PEP. What do you think?"

"Why have you chosen Halifax?" I asked.

Mr Melton responded: "It is a large, well known company, and has fallen a long way since its highest point early this year, so it must be a good buy."

"You must be careful selecting individual companies as the risk can be high, even with companies like Halifax that look safe," I replied. "First, you should read the latest annual report, and find out about Halifax's business plans. Then technical facts like the price/ earnings ratio and the yield should be considered and compared with the rest of the sector. You should also consider analysts' forecasts, and compare the company with the financial sector as a whole, and try to ascertain whether or not Halifax is likely to outperform the market."

"Do I really need to take all that trouble?" asked Mr Melton.

I suggested that we look at this from a different angle. He owns a chain of greengrocers. "Say you saw a shop for sale on the corner of your road and you wanted to invest in it. Would you not first ask a few questions?"

"Yes, I would want to know its annual profit and overheads, how many greengrocers are in the area, if any superstores are being built locally, and how loyal is the customer base."

"Exactly," I said, "and you should take the same amount of care when picking a company to invest in on the stockmarket."

Mr Melton agreed this was true and wondered why he had not thought about this before. Utilising your single company PEP allowance is a good idea, but you must ensure it fits in with your overall investment strategy. He holds a number of shares which are a mixture of privatisations and windfalls.

"You must be careful picking individual shares because your experience with windfalls and privatisations is very positive," I stated. He agreed that they had done exceptionally well. In fact, they were some of the best investments he'd had.

"But," I countered, "privatisations were sold off cheaply with a view to them being successful from day one. As for the windfalls, you have not paid a penny for them. Things are different when you sit down and start from scratch picking squares; that is why we recommend unit trusts and investment trusts. Your investment is managed on a daily basis by a professional manager and is spread between many different companies."

"But you can't invest through these in a single company PEP," said Mr Melton.

I replied: "Technically this is true, but there are a number of products that get around this problem. To qualify as a holding within a single company PEP you must hold a UK company or a European company. Unit and investment trusts are excluded. One or two investment groups have launched companies that qualify as European companies, but operate in a way similar to unit and investment trusts."

"What you mean I that can use my single company PEP allowance and put the money into an investment that spreads my risk," said Mr Melton.

"Yes," I replied. "I like the HSBC Triple Allowance single company PEP. This invests in the UK, US, Europe and Japan, tracking their indices."

The following day I wrote a letter to Mr Melton outlining the basics of our conversation and explaining the HSBC Triple Allowance PEP in more detail.

This particular single company PEP fits Mr Melton's circumstances well. His overall portfolio of equities is worth pounds 20,000, most of which is invested in unit trusts, and to invest pounds 3,000 in a single share through a PEP would have been off-balance in relation to the rest of his portfolio.

Mr Melton decided to go ahead with his single company PEP investment in HSBC. He now wants me to look at his wife's circumstances: she liked the idea of investing in the Body Shop but is currently having second thoughts.

Tim Cockerill is managing director at Whitechurch Securities, independent financial advisers,

14 Gloucester Road,

Bristol BS7 8AE (0800 374413)

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