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The sheer growth and diversity of the market has created problems for investors, including those who already have a portfolio of PEPs and those standing on the brink of investing

Personal equity plans have proved to be a popular investment choice, offering scope for capital and income growth free of income and capital gains tax.

Over pounds 20bn has been invested in some 5 million PEPs since their introduction in January 1987, and with over 1,000 on the market, investors have a bewildering array to choose from.

But the sheer growth and diversity of the market has created problems of its own for many investors, including those who already have a portfolio of PEPs and those standing on the brink of investing.

Independent research suggests that thousands of investors have built up their portfolios in a haphazard way and are holding PEPs from several different plan managers. As a result, many are realising that they've lost track of the initial investment strategy and have ended up with an ill-constructed portfolio, without one adviser to manage the overall picture.

Add to this the volumes of paperwork issued by each plan manager together with the separate management charges, and many investors are losing out financially.

So what is the solution? To start with, investors should not view PEPs as an isolated free-standing investment, but as an extension to the main portfolio, in turn ensuring that holdings in the PEP and portfolio are complementary to each other. This will help to avoid unnecessary duplication and make it easier to control the risk profile.

One method of streamlining the administration of PEPs is to transfer the management of all your PEPs to one manager. Consolidating administration with a single plan manager could lead to substantial cost savings.

However, it is important first to check the selected plan manager's management charges, including any transfer-in and initial fees, and obtain an estimate setting out all charges, as well as the amount of savings likely to be made as a result of the transfer.

Bell Lawrie White, for example, has no initial fees or transfer-in charges and operates on a sliding scale of 1 per cent on the first pounds 20,000 and 0.35 per cent thereafter, so the annual charge, subject to VAT, on a portfolio of pounds 40,000 would be pounds 270 or 0.675 per cent.

Assuming an average annual management charge for a PEP of 1.25 per cent, the cost saving alone on a PEP holding of pounds 40,000 would be pounds 230 per annum.

Many plan managers charge for transferring existing holdings, however. Worse still, you may be asked to sell your holdings and transfer the proceeds to your new manager, incurring commission charges and a new front-end charge in the process.

Ideally, investors should try not to get into that situation. At the very least it is therefore important to look closely at exit charges before buying a PEP, because if these are high, it will reduce your ability to adapt your investment strategy if personal circumstances change.

It is also important to choose the most suitable kind of PEP before making or transferring an investment. Investors wishing to reduce the paper work yet retain existing investments should consider a change to a manager that provides self-select general and single company PEPs, managed on an advisory basis.

Another option is a discretionary managed PEP which will accept existing investments.

PEPs can, however, normally only be bought with cash. For many, this presents an obvious problem as cash is not always available.

One option is to sell an investment and use the proceeds to facilitate the purchase. If there is no fundamental reason to sell existing holdings, an alternative means of buying the PEP is through a "bed and PEP" transaction. However, this is only appropriate if buying a self-select general and single company PEP or a discretionary PEP that will accept existing holdings.

A "bed and PEP" transaction involves selling an existing holding to realise the amount to be purchased and immediately buying back the same stock within a PEP.

This process not only allows the purchase to be made, but makes it possible to maintain the balance of the portfolio.

Apart from transaction costs, the holdings remain the same. Again, investors wishing to follow this course should first obtain an estimate of charges, and as a benchmark.

Bell Lawrie White's "bed and PEP" charges for the purchase of a pounds 6,000 PEP are 1 per cent commission on the sale and the purchase, a total of pounds 120, plus 0.5 per cent stamp duty, a total cost of pounds 150. In addition, clients receive free advice on the most suitable holdings to be put through this process.

Advice is increasingly important. Since PEPs were introduced in 1987, the rules have altered significantly, with most individuals finding it difficult to keep abreast of changes. Investors considering a PEP should first of all find out from a professional independent investment adviser if this is a suitable investment for them. An investment adviser can add real value over execution-only services by assisting in the selection of a PEP and monitoring its performance to meet the individual's objectives. As with any wholesaler, stockbrokers responsible for advising clients are able to offer competitively priced investment products, free advice, and if requested investment performance appraisals.

Unlike many other professional services, the clock does not start ticking as soon as you start speaking. In fact, it does not tick at all.

Fraser Gardiner is a director of independent stockbroker Bell Lawrie White & Co, which has offices in Edinburgh, Birmingham and Cardiff.

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