PEPs find a new home in paying off the mortgage

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The Independent Online
Personal equity plans are sold mainly on the strength of their tax benefits - but they have other advantages that increase their attraction as long-term savings products.

In particular, PEPs are becoming more and more popular as backing for a house purchase, rather than the traditional with-profits endowment policy.

You pay the lender interest only over the term of the mortgage and make regular payments - normally monthly - into a managed PEP.

Using PEPs in this way has a number of advantages. If they perform well, for example, you may be able to pay off all or part of your loan ahead of schedule.

Some borrowers are planning to use this technique in a structured way. Geoff Walker, a systems analyst in Richmond, Surrey, is buying his pounds 90,000 flat with a PEP mortgage that combines three elements from different providers: a pounds 70,000 interest-only loan from Bank of Scotland, an M&G PEP and life assurance from the Equitable.

"We are looking to start liquidating the loan in stages," he says. "My wife wants to take a year off in her 40s -she's 30 now - and we want to make a big cut in the mortgage interest payments at the time.

"We are in our second-year PEP with M&G, but for the next year I'm going to look into the performance tables and see if there is an alternative offering higher growth.

"I think we will probably look to have two or three different PEP managers over a few years, depending on performance," he says - highlighting another key advantage of the product: if a fund performs badly for a few years, you can switch to another manager without incurring heavy penalties.

The other main use of a PEP is in saving towards retirement. A survey to be published later this week by Fidelity Investments shows that about half of all potential PEP investors want them to fund retirement.

Flexibility is, once again, an important attraction of PEPs as savings vehicles.

While pension plans are geared to a fixed retirement date, investments in personal equity plans can be cashed in at any time, tax-free.

Margaret Horn is planning to retire from local government at 60 "or maybe a bit before" - at which point she intends to move. While many pensioners uproot from the cities to the seaside, she plans to migrate in the opposite direction: from Sussex back to the Midlands, to be nearer to her children and grandchild.

"I've been putting money into PEPs for the past four years - and if I do decide to pack my bags a year or two early, it will help to bridge the gap until the pension starts at 60," she explains.

After her husband was killed in an accident, leaving her a widow at 42, Margaret has had to make a determined effort at financial planning for the first time.

"We were both in good jobs, both with good pensions, and I suppose you could say we took no thought for the morrow," she admits.

"But once the first shock is over, you have to come to terms with the changed financial situation. The attraction of the PEP is that I can draw an income, or take some of the capital as and when I need it."

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