Personal Equity Plans: They think it's all over ...

... but it isn't yet. Despite their planned abolition in 1999, PEPs still have plenty to offer to investors. Here, and on pages 15 to 17, we examine the options

THE GOVERNMENT'S plan to abolish personal equity plans (PEPs) in April 1999 to make way for individual savings accounts (ISAs) has left many investors in a pickle. Should you bother with PEPs in the current tax year and in 1998-99, given that they're going to be replaced?

The good news is that under the ISA proposals, as they stand, you will be allowed to transfer up to pounds 50,000 worth of PEP assets into ISAs in 1999. And all income and gains on assets held in ISAs will continue to be tax-free, just as they are in a PEP. If you are sure you won't go over the pounds 50,000 limit, ISAs will not be a problem; you'll simply roll over your investments.

However, the outlook is not so bright if you're likely to have PEP assets worth more than pounds 50,000 by April 1999: you face losing the tax breaks on investments that you can't transfer.

Emma Weiss, spokeswoman for the unit trust and PEP managers organisation Autif, believes all investors should continue to use PEPs until the last moment as "they will still be getting that tax-free boost". She points out that PEPs are not investments in themselves. Rather, they are a wrapper in which you can protect certain assets from tax.

The bottom line is that if you would not buy the investments if the tax benefits were unavailable, you should not hold a PEP at all. Only ever invest because you believe in the value of the underlying investments.

Don't worry about having to sell assets that do not make it into an ISA. The fact that you will pay tax on certain investments isn't a reason not to buy them. "If you're going to buy equities, buy them now and get a year of tax relief," says Roger Cornick of the PEP company Perpetual.

Remember, the rules about ISAs are not yet set in stone. Following a consultation exercise during which investors and companies protested strongly about the pounds 50,000 limit, it is possible it will be raised or that investments held in existing PEPs will remain tax free even if they can't be transferred into an ISA.

However, before buying a PEP, make sure it's really suitable for you. Not everyone actually needs the tax breaks that PEPs offer. Non-taxpayers are an obvious example, but other investors may find the breaks aren't that worthwhile. Everyone is allowed to make a certain amount of capital gains each year without paying tax - pounds 6,500 in 1997/98. Only a few investors are ever liable to this, so in practice the benefit for most people with a PEP is the tax-free income.

Bear in mind, too, that if you have to pay an additional charge to hold investments in a PEP, this will eat into your tax savings. This is not the case with most unit trust PEPs (including the index-tracking funds), but if you pay more in additional charges than you save in income tax, your PEP is actually losing you money each year. Higher-rate taxpayers are less at risk of this as they save more tax from PEPs.

Rachel Medill, a director of M&G, one of the largest PEP providers, points out that even if you're not going to use your capital gains (CGT) allowance in this year, you may do so in the future. Also, she argues, "we know the Government is going to review CGT in the next Budget ... the rules may change significantly."

On this reasoning, most investors will want at least to consider PEPs before they're abolished. As Roddy Kohn, of independent financial adviser Kohn Cougar, says: "There's still another year and a bit to shelter gains and income from tax, and the PEP rules are pretty generous."

You can put up to pounds 6,000 worth of assets in a general PEP in any one tax year. Most people buy PEPs where a fund manager makes investment choices on their behalf, usually through a unit or investment trust. These funds invest in shares and bonds.

To qualify for the full pounds 6,000 allowance, at least half the holdings of unit and investment trusts must be UK or European Union companies. Up to pounds 1,500 of the pounds 6,000 can be put into non-qualifying trusts each year. These can invest anywhere in the world.

A range of other investments may also be held in a PEP. In a self-select PEP - where you pick the investments - you can hold individual UK and European shares, certain bonds, gilts and even, for a time, cash.

On top of the general allowance, everyone is entitled to a single-company PEP allowance each year. You may use this to PEP up to pounds 3,000 worth of shares in one company.

The PEP you should opt for depends on how confident you are about investment and why you're investing. Anyone unsure about managing their own portfolio will feel happier with a PEP run by a fund manager.

Many investors benefit from advice. If you do not know any independent financial advisers, IFA Promotion will provide you with a list of those in your area. In addition, Chase de Vere (a firm of financial advisers) and a number of magazines publish directories of PEPs and PEP providers.

q The 'Independent' and 'Independent on Sunday' have a free guide, 'Making Your Investments Work for You', which looks at PEPs as well as a range of other investments. The 16-page booklet is sponsored by Wesleyan, a mutual financial company. For a copy call 0800 137 9749.

q Contacts: Chase de Vere, 0800 526091; IFA Promotion, 0117 971 1177; 'Investors Chronicle', 0171-463 3000; 'What PEP', 0171-638 1916.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
This phoenix rose from the stage at the London Olympics. The insurer grew out of zombie life insurance funds

Phoenix Life: Chance of a refund for overcharged policyholders has risen

A retired adviser got his money back from the insurer after claiming he had been overcharged. Thousands of others may have a strong case
Expect a new wave of fishing expeditions by fraudsters now we can invest our life savings

Cold callers and your pension: watch out for dangerous boiler room scams

Sean O'Grady received a cold call last week that was much more sinister than normal. Yes, someone wants to get their hands on his pension...

Fuel poverty could claim 100,000 lives over next 15 years, warns energy charity

The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter

MPs call for Equitable Life policyholders to be paid £2.8bn owed by government

Hundreds of thousands of people's policies were hit when the mutual insurer almost collapsed at the turn of the century

The elderly woman's family discovered the mistake

DWP criticised after it left a pensioner £26,000 worse off

The Department for Work and Pensions has been slammed after a series of cock-ups left an elderly pensioner £26,000 worse off.

The FCA has today issued a consultation paper on its plans to tighten up consumer credit rules to give consumers greater protection on guarantor loans and in other areas

Payday loan companies must publish their rates, says CMA

A 20-month investigation concluded that a lack of price competition between lenders has led to higher costs for borrowers

Vulnerable consumers are defined as those with poor literacy skills, those who have caring responsibilities, people with disabilities, dementia or the old

Financial companies are not meeting the needs of vulnerable consumers, says City Watchdog

The Financial Conduct Authority said the industry needs to start thinking about solutions to these challenges

The FTSE 100 is inching closer to its record high but can it maintain these levels?

In 1999 stock markets quickly tumbled, losing many a fortune in the process

Tax-free savings: Freedom dawns for the junior savers caught in low-income accounts

The parents of six million children stuck with low-interest saving accounts worth more than £5bn will be able to move the cash from this April. But what are their options? Samantha Downes reports

How much lower will mortgage rates go?

Another day, another cut. As lenders compete to offer the cheapest deals, Simon Read asks if borrowers should jump in now or wait for further falls

Are bills ruining your family life? Try the lover's guide to coping with debt...

If you're in the red and can't find a way out, it's time to get some help. Neasa MacErlean hears that relationships will suffer unless you are open with your partner, but there are organisations that will put you on the right track and get you talking

How to complain: From retailers to energy suppliers, it's easier than you think

When companies let us down, millions of us just take it on the chin. Simon Read shows how to make your voice heard
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Austen Lloyd: Law Costs HOD - Southampton

    £50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

    SThree: Recruitment Resourcer

    £20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Day In a Page

    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot
    Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

    Poldark star Heida Reed

    'I don't think a single bodice gets ripped'
    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn