Tax Tips: Get your PEPs while stocks last

It's not too late to start saving in a PEP. Sarah Barnett explains how they work
Click to follow
Indy Lifestyle Online
If you are a regular reader of the financial pages, you will be no stranger to the personal equity plan (PEP). Although its demise is imminent, it still represents one of the best ways to invest in the stock market.

PEPs enable you to invest in shares or collective investment vehicles, such as unit and investment trusts, free of income and capital gains tax. Each year you can put up to pounds 6,000 in what is known as a general PEP. In addition, you can put up to pounds 3,000 in a single company PEP, which can hold ordinary shares in one UK or EU company. You are only allowed one of each of these PEPs per tax year.

There is no minimum investment stipulation but, in practice, most providers will not permit investments of less than pounds 1,000 for lump sums or pounds 50 for monthly contributions.

PEPs do not have a fixed time span and you are free to cash in your investments whenever you choose. But to ensure you recover from any stock market setbacks, you should regard a PEP as a relatively long-term commitment.

A general PEP allows you to invest up to pounds 6,000 in the following investments:

n Ordinary and preference shares of companies listed in the UK or on a recognised EU stock exchange.

n Fixed-interest securities of UK companies (better known as corporate bonds).

n Unit trusts, investment trusts and open-ended investment companies (Oeics), which are at least 50 per cent invested in either or both of the above assets: these are known as "qualifying funds".

n "Non-qualifying" unit trusts, investment trusts and Oeics (those that don't meet the 50 per cent rule); however, these can only account for a quarter, up to a maximum of pounds 1,500, of your general PEP investment.

If you are a first time investor, or cannot stomach dramatic fluctuations in the value of your funds, you should look to invest in pooled vehicles such as unit trusts and investment trusts rather going directly into equities. These give you diversification and reduce your exposure to risk.

You should also be cautious if you are about to dip a toe into shares for the first time as the market has recently been experiencing record peaks. Although this growth in share prices shows no signs yet of abating, you are buying shares at a time when the market is expensive.

If you do not want to be exposed to the full thrills and spills of the stock market, you may wish to consider guaranteed or corporate bond PEPs. Guaranteed PEPs provide a degree of protection against stock markets falling while corporate bond PEPs provide a fixed return.

For those brave enough to invest in equities, Doug Brodie, director of independent financial adviser PEPmaster, recommends making regular contributions. As he points out: "The danger of lump sums is that you could be buying into the market when it is at its most expensive whereas, with regular monthly savings, you can guarantee that one of your premiums will be within 15 days of the lowest price during the year."

However, not everyone will benefit from having a PEP. Charges can wipe out the tax breaks for lower rate income-tax payers. There is also some doubt as to whether you are likely to make much money by investing at the moment.

"The litmus test to deciding whether to invest in equities is do you think that the market is very high? The PEP only works on the basis of profit. If you think there is no profit to be made then it's a waste of time," says Mr Brodie.

The author is editor of 'What Investment'.

Comments