A sugar-coated deal that failed to tempt investors
Why have bond PEPs attracted so little interest? By Neil Baker
Wednesday 03 July 1996
The investment industry hoped that putting those products inside the tax-free wrapper of a PEP would attract investors looking for a higher return than they could get down at the building society, and who wanted a long-term investment that would help to pay off the mortgage or the school fees, but who didn't fancy the risk of investing in shares.
But the take-up of products launched so far has been patchy and the amount invested in corporate bond PEPs so far adds up to just pounds 1.3bn, compared to pounds 5.7bn in general PEPs in 1993-94, according to the trade body Autif. The average gross return on the corporate bond PEPs launched a year ago is 10-11 per cent net of tax - which means that even if they are taking income, most early investors have already covered their start-up costs which will have been 7-8 per cent of the investment on average. But performance has been overshadowed by equity-based PEPs.
"There is a growing awareness of corporate bond PEPs and they are growing in popularity, but they are still not as popular as the industry thought they would be," says Colin Jackson of the independent financial advisers Baronworth Investment Services. "They were hyped to start with and everybody had great expectations, but the reality is that clients have to like it."
Ian Millward of the independent advisers Chase de Vere says that bond PEPs have become more popular in recent months, but that the trend is short-term and mostly a result of the large amount of Tessa money slushing around the investment market.
"People have avoided going overboard on them," he says. "In the past when there has been a new investment vehicle, there has been a lot of shouting from the rooftops and people have invested without really understanding what is involved. It seems that with corporate bond PEPs, the industry and individual investors have been a bit more restrained. If you are looking for high income and no growth, that is fine, but if you are looking for capital growth or rising income, you are better off in an equity-based investment."
Colin Jackson says that the ideal bond PEP investor is in late middle- age, wants more than the building society can offer, knows that yields on bonds are not guaranteed and doesn't already have a regular equity PEP. "That's quite a tall order. Most older investors who are looking for income or yield want a guarantee and they want something very simple. One of the big problems is that investors see a headline rate of 8 or 9 per cent, and they assume that is the yield they are going to get. It is only when they discuss it with someone that they realise that, with a few exceptions, it is not a guaranteed yield. I think that really has put a lot of people off."
Mr Millward agrees that bond PEPs are suitable for some investors. "They do have their place, but they are not the big solution to every building society investor who are not happy with the return on their money." But he warns: "The fear is now that if interest rates start to rise - which is not really an issue now, but could well be over the next five years - that will have an adverse effect on the capital value of the bonds."
Investors considering a bond PEP need to consider what level of return can be expected, how much risk the PEP manager is taking to get that return, and what sort of track record the PEP manager has with company bonds, as opposed to equities - some have limited experience.
To complicate matters, the PEP providers can quote different rates of return. There is a key difference between the current or distribution yield, which is how much your PEP is likely to actually pay out, and the yield to redemption, which is the likely total return on your investment and includes any gain or loss on your initial capital. "Yield to redemption is the real figure; the rest of it can be manipulated," says one expert.
One particular factor that affects the yield is how the manager deducts the fees charged for setting up, and then looking after, the PEP. These can be charged against your annual income or your capital. With an income- producing investment such as a bond PEP, it is important to realise that charges taken from capital will gradually erode the base of your investment.
It is always important to consider all the different charges together. In general, you should expect to pay an initial charge totalling around 3 per cent of the money you invest and then an annual charge of about 1 per cent. If there is no initial charge, check whether there is a "back- end" penalty charge when you come to sell your PEP. On top of that, there will be commission to pay if you use an independent financial adviser to track down a PEP for you. A typical commission is 3 per cent, although some IFAs will give part of this back.
This week's highest-yielding bond PEP is from Abtrust Unit Trust Managers. Its investment strategy - graded medium risk by Baronworth Investment Services - generates a running yield of 9.24 per cent and a redemption yield of 10.1 per cent. PEPS with a lower yield but guaranteed return are also available - the Johnson Fry Secured Corporate Bond High Income PEP currently offers investors a guaranteed 6.75 per cent per annum together with guaranteed return of capital at the end of five years.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Olympic diver has made his modelling debut for Adidas
- 2 Isis release 'Flames of War' video warning Obama of attacks troops could face in Iraq
- 3 Pakistani passenger power forces two politicians off plane
- 4 Say yes to 'no-poo': It's been three years since I stopped washing my hair
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Scottish independence referendum: A nation divided against itself
The political class is doing what Hitler couldn’t – destroying Britain
Scottish independence: Nationalist leader Jim Sillars threatens pro-union companies with 'day of reckoning' after independence
Portuguese academic says British are 'filthy, violent and drunk'
Scottish independence: The Queen breaks silence on referendum debate – as think tank warns of £14bn black hole if Scotland votes Yes
iJobs Money & Business
£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...
£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...
£20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...
£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...
Day In a Page
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony