Personal Equity Plans: Good entrance, but check the exit

With an annual charge of just 0.5 per cent on its PEP, Legal & General claims investors won't get soaked

MANY of the low- cost, direct PEP firms point out that they have no initial charge, writes Simon Read. Companies such as Legal & General and Virgin Direct have done away with their upfront charges in the past two years. This strategy has been very successful and these managers have attracted much of the new PEP business, especially as many other companies still make an initial charge of up to 5 per cent.

The low-cost companies have also pared annual management charges to the bone. Legal & General undercuts nearly every other PEP available by charging just a 0.5 per cent annual charge. This compares with a typical fee among most PEP managers of around 1.5 per cent.

Many of the cheapest funds aim to replicate average market performance, rather than beat it by choosing individual shares. They do this by using tracker funds that simply buy all, or a representative sample, of the shares in a particular index such as the FT-SE 100. Because the investment risk is spread among a wide range of different companies, in theory the risks are lower.

On the other hand a tracker fund will not be able to match the potential performance of an actively managed fund. Fund managers get hefty pay packets for a good reason. While they sometimes fail, they do aim for the stars, while tracker funds could be said to be aiming for mediocrity.

Elsewhere watch out for exit charges. M&G, for instance, is guilty of charging 4.5 per cent if you cash your PEP in before the first year of investment is out, although the charges drop year by year. Others charge a lump sum - Henderson, for example, charges pounds 20.