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.
Will your credit card rewards be scrapped following new EU rules on charges?
Dirty tricks in a divorce can cause some nasty surprises
What would happen if you put a statistician in a casino with £1m?
10 tips for taking out a personal loan
Simon Read: 'The fight must go on over equality on expat pensions'
- 1 Frank Lampard's face drops when Holly Willoughby introduces him as a 'Man City legend'
- 2 Sofyen Belamouadden murder: The inside story of a crime that horrified Britain
- 3 Company breaks open Apple Watch to discover what it says is 'planned obsolescence'
- 4 The Visit: Trailer for M Night Shyamalan's latest horror film is terrifying
- 5 9/11: Iranian General accuses US of organising September 11 terror attacks
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband
The sickening truth about food banks that the Tories don't want you to know
Aaron and Melissa Klein: Oregon anti-gay bakers ordered to pay $135,000 after refusing to make cake for same-sex wedding
Andrew Lloyd Webber: Phantom of the Opera writer mocked after issuing a warning about Ed Miliband and Nicola Sturgeon
General election 2015: Labour will toughen hate crimes legislation surrounding Islamophobia
HSBC review into moving headquarters from UK 'underway'
iJobs Money & Business
£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...
£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...
£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...
£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...
Day In a Page
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace