A PEP in the Budget spirit

SAFER PEPs are taking a new turn with the launch of a product that will invest in bonds of a single industrial company.

The promoters claim the new PEP is the first in the spirit of Ken Clarke's last Budget initiative aimed at helping UK industry raise cheaper finance.

The new PEP will invest in specially issued bonds from brick and roof tile company Redland and will offer a fixed tax-free income of 7 per cent a year for five years or a fixed total investment return of 40 per cent. Marks & Spencer is also believed to be looking at offering investors specially issued bonds through a PEP.

The PEP is sold through financial advisers and stockbrokers and pays the same rate as similar PEPs already offered by Legal & General and financial adviser Johnson Fry. These have been criticised because the bonds are from financial services companies rather than "proper" industry.

Bond PEPs, which offer investors a higher income but less potential for growth than PEPs, whose underlying holdings are shares, have yet to attract many investors despite their lower risks.

Most bond PEPs, instead of investing in one company, invest in a range of bonds through a unit trust and offer incomes of closer to 8 per cent, or even higher. This diversification reduces the risk of your investment going up in smoke if one company goes bust. But this is at the expense of the paid-out income varying, and of not knowing in advance when you will be able to get your original investment back without loss. Many of these bond unit-trust PEPs carry high charges.

All charges are built into the latest Redland bond launch, which is branded the Eurolife Guaranteed Bond PEP (after the company promoting it). The PEP is open for investment until 20 November and has a total investment limit of pounds 30m.

Redland is one of the biggest companies in the UK. But higher-yielding bonds might come from smaller companies in future.

Stockbroker ShareLink is offering a free booklet How to Select and Use Corporate Bonds for a PEP. Call 0121-233 9955.