Investors had already bought almost pounds 5bn worth of personal equity plans by the end of November with four full months of the current tax year still to come, compared with pounds 5.25m in the whole of 1995-96 In most years two- thirds of the annual sales are concentrated in the last few months of the tax year and this year the sales season looks like being very busy, and it may well spill over into the start of the 1997-98 tax year, just in case Labour wins the election and Gordon Brown the probable Labour Chancellor puts a limit on PEP holdings in the interim budget Labour has promised within four weeks of winning an election.
Over the last 10 years a total of pounds 24bn has been invested. Individuals who have contributed the maximum allowed each year could each now have sheltered up to pounds 64,000 in a PEP and the most successful plans will now contain shares worth over pounds 200,000 with tax-free income as well.
The worst a Labour Chancellor is expected to do is put an overall limit on the amount of money an individual has put into PEPs and perhaps TESSAs since they were introduced. Annual investment allowances for smaller investors are unlikely to change, but PEP providers are competing for business and will play on fears of a tougher control.
The most obvious attempt to play on investors' fears came this week from Legal & General whose Election PEP goes on sale next Monday until February 21. It is run as a Dublin-based company which qualifies it as a single company as well as a general PEP so investors can put in the maximum annual allowance of pounds 9,000, including if they wish transfers from PEPS managed by other providers, which are accepted free of charge.
The plan charges an initial fee of 3.5 per cent and a management charge of 1 per cent a year, but the returns are calculated on the full sum put into the fund. The plan pays back the capital in full after five years, plus 1.4 times any gain in the FTSE 100 share index over that time. So 50 per cent rise would turn into a 70 per cent gain.
But it is not an equity fund and it pays no dividends. Roughly 70 per cent of the investment is simply put on deposit where it should earn the managers enough to repay the investment at maturity. The balance is used to buy options on the performance of the FTSE 100 share index which should meet the growth target.
In order to minimise the risk of investing ahead of a steep fall in the index after the election and maturing in the middle of a downturn in the market in 2002 the value of the investment is averaged over the first year and the maturity value over the whole of the fifth year.
This means the investor will get only four years potential growth for his money and critics claim investors will probably do better to invest in a growth fund or even an index-tracking fund which should earn in excess of 30 per cent gross income over five years.
Perpetual is offering next month a World Income PEP fund which will deduct management charges from capital and aims to pay a gross yield of 4 per cent. Schroder is offering an Income Option PEP and a Growth Option split between three Schroder unit trusts, the smaller, companies, European smaller companies and the Pacific growth funds. Prudential is offering a High Income version of the Prudence Gold PEP which will aim to yield 7.5 per cent tax free by investing in corporate bonds, government stocks and up to 20 per cent in shares.
Prolific is offering a triple choice of an income plan currently yielding 7.52 per cent tax-free, a capital growth plan and a combined plan. The initial charges are 3 per cent and the annual charge 1 per cent, which is less than the average for most managed funds.
At the other end of the scale Fidelity investments believes the last thing investors want is more choice. With 1,700 PEPS to choose from already investors want simpler plans, lower charges and a better understanding of the risks and rewards of investments like PEPS, which can go down as well as up in value.
It is spending pounds 2m on marketing including 40 free seminars across the country (Call 0800-371318 for local details) and refunding initial charges on 1997-98 PEPS for investors who invest or transfer in their 1996-97 and 1997-98 PEP allowances.Reuse content