Managers put some PEP in it

Up to pounds 6,000 a year may be sheltered tax-free in a choice of 163 trusts. Liz Walkington reports

FOR INVESTORS who opt for an investment trust as a way into the stock market, it can make sense to wrap the investment in a personal equity plan (PEP) and avoid paying tax.

After a slow beginning, investment trusts have become enthusiastic participants in the PEP market. Investors can now choose from 163 trusts that are eligible for PEP investment, and 33 management companies offer plans, which among them attracted a total investment of pounds 140m in the first half of the year.

You can shelter up to pounds 6,000 (all your annual general PEP allowance) of investment trusts in a PEP each year, so long as they are qualifying trusts - that is, trusts which have at least 50 per cent of their holdings in European Union shares or bonds. If your holdings are in non-qualifying trusts, a limit of pounds 1,500 applies for PEP inclusion.

The level of charges is a potential attraction of investment trust PEPs. The annual management charge on the underlying trusts is, on average, lower than that on unit trusts. Newer investment trusts tend to have higher charges than older ones, but they are still of the order of 1 per cent, whereas many unit trusts now have fees of 1.5 per cent.

Admittedly, there are almost always additional charges for buying an investment trust through a PEP. Some investment trust PEPs, however, carry no initial fee, while the dealing charges for buying and selling trust shares are mostly between 0.2 per cent and 1 per cent. In comparison, stockbrokers' commission on share transactions often starts at 1.65 per cent.

The majority of plans are open to both lump-sum investments and regular savings. The minimum amounts accepted may be as little as pounds 20 a month or pounds 250 for lump sums, and typical figures are pounds 50 and pounds 1,000 respectively. Plans may be angled towards providing income, capital growth or a mix of the two.

Of course, PEPs offered by management groups generally include only the company's own trusts. Investors can usually switch holdings from one trust to another within the range with little or no charge.

A couple of managers, however, go beyond their own trust range. Alliance Trust specifies that the first pounds 1,500 invested must go into one of its own trusts, Alliance and Second Alliance, but this can be topped up with any of around 60 trusts from a variety of management groups. Ivory & Sime's plan offers a choice of the company's trusts on a self-select basis, but also three managed portfolios which include trusts chosen across all management groups. Two of the portfolios are designed for capital growth, the third for income.

It is also possible to invest in a mix of trusts through managed and self-select plans offered by stockbrokers and independent advisers. The former would be based on the PEP manager's choice of trusts, while a self- select plan gives the investor a free hand.

Generally, however, these are more expensive, as dealing costs tend to be higher and there may be a minimum commission charge, so they are more suitable for larger investments.

Many of the plans offered by the management groups are based solely on investment trusts, but in a few cases shares or unit trusts may also be included.

The most important issue is performance. Here, investment trusts have an excellent long-term record: over 10 years, they have outpaced rival products by a healthy margin.

In fact, as the table shows, the best investment trust in an ordinary savings scheme would have beaten the best unit trust in a PEP. When the tax advantages of the PEP are added on, the return is pounds 1,500 better than its nearest rival.

o Liz Walkington works for investment trust manager Ivory & Sime.

PEP comparisons

10-year performance

Best investment trust PEP pounds 11,030

Best investment trust pounds 10.291

Best unit trust PEP pounds 9.504

Av. investment trust PEP pounds 8,827

Best with-profits endow. pounds 7,999

Av. unit trust PEP pounds 7,689

Av. unit trust pounds 7,169

Av. with-profits endow. pounds 7.041

Returns are based on a pounds 35 per month investment over 10 years to 1 April 1995 for best and average UK equity income investment trusts and unit trusts inside and outside a PEP plus best and average with-profits endowment plans. Investment trust figures are on a mid-market to mid-market basis; unit trust figures are on an offer to offer basis; endowment figures are actual maturity values. Averages are on an arithmetic basis.

Source: HSW, Money Marketing

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

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