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Charging into hidden costs

From the trenches
As we approach the end of the tax year, the PEP providers go into overdrive offering better deals to attract new investors.

Today Perpetual, one of the leading fund managers, is launching a World Income Fund PEP with a discount of 2 per cent, reducing the initial charge to 3.25 per cent. But these kinds of offers are short term - Perpetual's discount lasts until just 28 February - and are designed to attract clients in the busiest PEP season of the year.

Behind the launch offers and end of tax-year deals, however, there has been a real price war going on.

Now it's possible to pick up a PEP and pay no initial charges with the likes of Virgin Direct and Legal & General. PEPs from these companies have even reduced annual management charges to around 0.5 per cent. So why does the most popular PEP manager, Perpetual, want to keep its front- end charge of 5.25 per cent and annual management fees of 1.5 per cent?

Because its performance has been so good in the past, Perpetual feels that there are plenty of investors who are happy to buy into those potentially higher returns.

A specialist fund can present greater risks and the novice or conservative investor may be happy with the average returns an index-tracker fund promises. Then it's simply a question of choosing on price - but you do need to check if there are any exit charges.

Some PEP managers, such as M&G, have done away with initial charges only to introduce sliding scales of fees if you close the PEP within five years.

Alternatively, you could contact a discount shop which offers a range of PEPs, including plans from well-known investment houses.

Many brokers offer cash-back or promise to undercut their rivals. The PEP Shop in Nottingham promises to beat any other broker's deal on a particular PEP, while Wolverhampton-based PEP-Direct, promises to be 5 per cent cheaper than any other broker. PEP Direct charges a flat 2.5 per cent for any PEP purchase, and offers full cashback discounts.