Take control, and take out a PEP too

Saving for retirement has traditionally involved an occupational or a personal pension.
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The Independent Culture
Alongside any personal or company pension, personal equity plans (PEPs) offer another means of saving for the future, but with greater flexibility.

With traditional pension plans, your money is locked away until you reach retirement age. Even then there are limits as to what you can do with it, with strict rules governing how much you can take as a lump sum and how much has to be used for buying an income for the rest of your life.

PEPs are different, as Graham Bates, a Leeds-based independent financial adviser, explains: "With PEPs you retain 100 per cent control over the cash invested, which of course will mean that you can have access to your money at any stage in life."

Effectively, you can do what you want with the investment, when you want. You do not have to wait until a specified retirement age, for instance, to get at your savings. You are at liberty to withdraw the money whenever you like, maybe to fund early retirement, an event which can be heavily penalised by conventional pension schemes.

Of course, that does not mean you should not be disciplined about PEPs. It is important to ensure your fund grows enough to give you a comfortable retirement.

But a PEP does offer you more options than a traditional pension. Timing, for instance, is crucial when it comes to providing the income on retirement. Out of the pension scheme, you must buy an annuity from an insurance company. This pays the purchaser an income for life in return for a lump sum. How much this income will be depends on a number of factors, but the level of interest rates at the time is the key determinant. Retire at the wrong time, buying an annuity when rates are low, and you will suffer from a reduced income for the rest of your life. The problem is less with a PEP as you can take the cash at your own convenience, or even use it to provide an income.

"Another possible advantage to using PEPs is the potentially lower charging structure," says Graham Bates. "The effect of charges when compounded over a long period will make a significant difference to the value of your retirement pot."

Further, the maximum amount that can be invested in a pension scheme is determined by your earnings. But with PEPs, up to pounds 6,000 a year can be put into a general PEP and pounds 3,000 a year into a single company PEP irrespective of income.

However, not all the advantages are with PEPs. Tax considerations must be taken into account. Contributions to a pension fund attract full tax relief so pensions are a most tax-effective savings opportunity. For every pounds 77 you contribute, the government adds another pounds 23. For higher- rate taxpayers, pension plans are even more tax-efficient with the government contributing pounds 40 for every pounds 60 put into a pension plan. PEPs, therefore, have to work hard and show extremely good growth to catch up with the better pension plans.

There are also investment restrictions with PEPs, particularly when it comes to overseas markets. Pension fund managers have no such restrictions and can invest fully in the potential of overseas emerging markets, for instance.

And unlike PEPs, where you are only allowed one plan manager, you can have as many personal pension plans as you like, up to the earnings limit.

If you are self-employed, saving for retirement through a PEP could put your cash at risk. As Graham Bates explains: "If your business fails, your creditors will not be able to touch any money tied up in your pension fund. They may, however, be able to force the sale of PEPs to meet any liabilities."

PEPs are due to be replaced in 18 months by the new Individual Savings Accounts (ISAs). At present, the Government has only just begun consultations with the savings industry about how the new ISAs will operate, so no details are yet available. But it is possible that a ceiling may be put on how much anyone can invest in an ISA. While this should not deter you from investing in PEPs now, it is something to bear in mind when building up your fund.

The secret is not to choose pension or PEP but both, making use of all the available investment opportunities and taking advantage of their various benefits. Graham Bates says: "The key, where possible, is to be able to combine contributions to a pension plan with money also being invested in PEPs to provide a broadly based retirement strategy."