Savings: PEP up while there is still time

Personal Equity Plans (PEPs) have two tax attractions. The freedom from capital gains tax has never been a big selling point. But the freedom from income tax is worthwhile.

A basic-rate taxpayer who had invested pounds 1,000 in a UK equity income unit trust 10 years ago and reinvested all taxed income would have an investment worth pounds 2,287 on average by the beginning of October 1997. If the same amount had been placed in a tax-free PEP, it would be worth almost pounds 300 more.

But the future of PEPS is under threat. The Government has not said in so many words that PEPs are to be scrapped when it introduces its Individual Savings Account (ISA) in 1999. But PEP managers will lose the facility to reclaim tax on dividends from that date which is a powerful indication that PEPs are for the chop.

ISAs are intended to continue and extend the principles behind PEPs and their cash cousin, the tax exempt special savings account (Tessa). The good news is that ISAs are likely to have low or no minimum investment requirements. They are also likely to offer a wider range of investments.

"It appears it may be possible for investors to set up their own portfolio and invest in a mixture of shares funds and cash deposits," says Don Clark, managing director of PEPDirect,discount PEP dealers.

The bad news is that the tax breaks are unlikely to be as generous as those for PEPs although the investment industry agrees some sort of tax incentive will be necessary if individuals are to be encouraged to use them.

Don Clark is hopeful that PEPs set up before April 1999 will continue to retain some of their own tax breaks. "Investors should therefore have few fears about opening a new PEP, or topping up their existing account, during 1997 and 1998," he says.

- Juliet Oxborrow