Not all PEPs are equal

Abigail Montrose on the options for people who receive windfalls
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The Independent Online
If you are one of the 16 million people who will receive building society windfall shares this summer, you should start thinking now about what you want to do with the shares.

Many people will want to keep them and the most tax-efficient way to do this is in a PEP. Thanks to a ruling by the Inland Revenue, investors who receive free shares from several demutualisations will be able to shelter these shares in a general PEP on top of their annual pounds 6,000 general PEP allowance.

Investors may also decide to open a single-company PEP for their shares, up to a pounds 3,000 limit. All the building societies which are converting to banks are likely to offer single-company PEPs to their shareholders. But as you can only put one company's shares in this type of PEP, if you are expecting shares from more than one building society this will not be appropriate.

Those expecting windfalls from more than one building society could shelter all the shares in a self-select PEP. But you will not be allowed to do this if you already have a general PEP, as you can only have one general PEP each tax year. Moreover, with a self-select PEP, you would be unable to then have a separate general PEP an addition to the self-select one you are sheltering the shares in.

So if you already plan to have a general PEP in the 1997/98 tax year and are expecting several lots of windfall shares, the best place to shelter them is in there.

Someone who receives pounds 1,000 of shares when Alliance & Leicester, Halifax, Northern Rock and Woolwich demutualise could put all these shares into their PEP on top of their pounds 6,000 allowance. This in effect would enable the investor to shelter pounds 10,000 of shares in their PEP for the 1997/98 tax year.

Several of the large PEP providers, including Perpetual, M&G, Schroders, Barclays and Mercury, have already said that they will allow their general PEP investors to shelter their windfall shares in their PEPs.

Paul Ashby, marketing manager at Barclays, believes it is only fair to tell investors before the beginning of the new tax year if they will be allowed to shelter these shares in their PEP. "If we don't offer this service, investors who invested their 1997/98 PEP allowance with us would find when they received their windfall shares in the summer they could not PEP them. By allowing them to shelter these shares in our general PEP this avoids the problem," he says.

Other PEP providers are allowing investors to temporarily shelter their windfall shares in their PEP. For example, Fidelity will take the shares into its PEP but they must then be cashed in and the money used to buy additional units in Fidelity's unit trust PEP. Save & Prosper offers a similar facility. The advantage of these schemes is that you can increase the amount you are allowed to invest in your PEP from pounds 6,000 to pounds 6,000 plus the sum at which your windfall shares are sold.

Many PEP providers are looking into what facility, if any, they will offer PEP investors with windfall shares.

Lloyds Bank hopes to offer investors the facility to place windfall shares into all its PEPs and will announce its decision before the end of the tax year. Virgin and TSB are looking into the possibility of offering this facility and hope to make an announcement before the start of the next tax year.

If you want to be sure that you will be able to place any windfall shares in your PEP, contact your provider to find out what arrangements it has made. M&G's Rachel Medill says: "To be sure that they can get all their bonus shares into a tax-free environment, investors looking for a 1997/98 PEP should choose a general PEP that will allow holding of individual shares in institutions which are coming to the stock market."

You can only have one PEP manager each tax year. So if you discover after 6 April that your PEP provider will not allow you to put any windfall shares in your PEP, it will be too late to start a new PEP.

If you plan to put your shares into a PEP, ask for a share certificate and put the shares into your PEP within 42 days of receipt.

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