PEP heroes challenged by old kid on the block

Legal & General is taking on rivals like Virgin with its new, cut-price products, writes Steve Lodge

One Of Britain's much-criticised life insurers is undercutting every mainstream PEP available - including those of Richard Branson's Virgin Direct - in a bid to establish itself as a "first-choice" PEP company.

The insurer, Legal & General, has added another cut-price option to its existing market-beating deal and is particularly targeting PEP transfers - getting savers to transfer their existing PEPs from other companies, rather than invest more money. L&G's new option offers a cheap, lower- risk choice for investors worried about the possibility of a stock market crash; the low charges also mean investors should have less to fear from the Government's planned introduction of Individual Savings Accounts (ISAs) than with other PEPs.

The basic proposition is rock bottom prices. For example, investors in Virgin's Growth PEP which tracks the performance of the stock market, in simple terms could save pounds 30 a year in charges on a pounds 6,000 PEP by transferring into a copycat stock market tracker run by L&G. "It's hard to argue with," says Martin Campbell, product development manager at Virgin, conceding that investors would be better off switching.

L&G's Index-Tracking PEP has just one charge - 0.5 per cent of the value of your investment annually. Most PEPs charge 1 per cent or more annually and also have other charges when you first invest. Index-tracking PEPs have also proved themselves in investment terms, showing consistently good returns compared with many PEPs claiming to offer market-beating performance.

As well as offering the cheapest stock market tracker, L&G last week slashed costs on another, lower-risk PEP offering a high tax-free income, again making it the cheapest of its kind on the market. The L&G Corporate Bond PEP, which gives a tax-free income of 7.5 per cent, also carries an annual management charge of just 0.5 per cent (or pounds 30 a year on a pounds 6,000 PEP) and, like L&G's stock market tracker, has no other charges.

Nevertheless, the savings on the bond PEP will be less important to many investors than the overall package now offered by L&G. Unlike trackers - which are basically the same and so differences in charges do matter - bond PEPs hold different investments which already give them the potential for significant differences in performance.

L&G is also offering completely free switches between its PEPs. Most other companies make some charge. Savers in tracker or other stock market PEPs who are worried about the market's precipitously high level at present could switch into L&G's bond PEP as an interim bolt-hole. If the market should then take a tumble, bond PEP investors should be better protected; they could then switch freely into L&G's tracker PEP at the lower level - and at absolutely no cost. Over the longer term a tracker PEP should outperform a bond PEP.

In addition, it is possible to get a cashback on switching into L&G PEPs by using a discount broker. Companies such as Chelsea Financial Services (0171-351 6022) will give a cashback worth 0.75 per cent of your investment (pounds 45 on pounds 6,000) for switches and new investments.

But L&G's deal will not suit all PEP investors. Many PEPs now carry charges if you transfer or cash them in within a certain time, which can total as much as hundreds of pounds. Even Virgin,with some of the lowest costs around, has an exit charge of 0.5 per cent of the value of investments, which would offset the other savings. Also, if you switch an existing PEP containing windfall shares, L&G will require you to sell them for the company's own investments.

The L&G deal comes as some investment companies are loath to launch new PEPs because of uncertainties about what will happen to them when ISAs come into being in 1999. Many savers may be better off sticking with what they've got until the details of the ISA and what will happen to existing PEPs becomes clearer, which could be this year. That said, L&G's low charges and its own lack of exit charges should mean that investors are certainly no worse off - and may be better off - than with other PEP companies.

If you do want to transfer, L&G promises to take care of all the paperwork, even if you use a discount broker. L&G itself is on 0500 116622, but contact a discount broker if you want the cashback.