PEPs, sweet and sour

TAX PLANNING: Every investment represents a risk, and someone considering a personal equity plan must decide on the degree of exposure they want. Simon Read explains how those on offer range from the single- company, whose value can vary rapidly, to the st corporate bond

Buying a personal equity plan is a bit like visiting a sweet shop: underneath those gaudy wrappers there is a world of difference in taste and quality, and buying the wrong sweets will make your children cry, though in the case of a PEP that may take a few years.

A PEP is simply the name of a way to shelter investments from the demands of income tax or capital gains tax. This is important to remember because there are many kinds of investment opportunities, and many kinds of PEPs.

A wise investor will choose the investment vehicle first, and then decide how to protect it from the Inland Revenue. The rules governing the types of investment allowed in a PEP are fairly broad, although specific when it comes to where you invest your cash.

It is permissible to invest in the UK, but not always all right to do so overseas. The investments you can hold in a PEP include individual company shares, pooled investments, such as unit trusts and investment trusts, and also fixed investments such as corporate bonds, preference shares and convertibles.

What they all have in common is that they represent some kind of risk, so deciding which kind of investment is right for you means assessing your attitude to risk.

The riskiest PEPable investment is to buy shares in an individual company. The price of shares can rise and fall minute by minute. It can be a roller-coaster ride and not one for the nervous, although if you already hold shares it may be worth putting them in a PEP to save paying tax on dividend income.

But the predominant investment in a PEP is a unit trust. This reduces the risk by spreading your cash among a wide number of shares and often other investments. Of the estimated pounds 35bn currently invested through PEPs, around pounds 25bn is in unit trusts. According to the Association of Unit Trusts and Investment Funds, only around half of the 1,500 unit trusts in existence are PEPable. This is because the PEP rules require the trusts to be at last 50 per cent invested in shares from the UK or the European Union.

Unit trusts come in a variety of formats, offering different levels of risk. Recent history shows that unit trusts that invest in smaller companies have offered best performance - Gartmore, Schroders and Hill Samuel are popular good performers - but these are high-risk funds, and anyone investing at the wrong time could easily lose out.

Increasingly popular these days are index-tracker PEPs. These are offered by the likes of Virgin Direct and Marks & Spencer on the basis of price and simplicity. With index-tracker funds there is no active investment management, as the aim is simply to replicate the performance of the FT- SE 100. But they can therefore limit your potential return. For the best performing funds you will have to pick a specialist unit trust. However, there is no way of knowing which funds will perform best and today's winners could be tomorrow's also-rans.

Novice investors used to the safer world of building society accounts could be better off investing in corporate-bond PEPs.

Corporate bonds effectively are fixed-interest loans to large corporations. As with any other type of loan the companies pay interest on the bonds and repay the capital at a pre-set date. Investors are therefore lending a company money for a fixed time and receiving interest on the loan until it is repaid.

Whatever your choice of PEP, expert advice will help guide you through this investment mine-field `The Independent' has produced a free 32-page guide to PEPs, written by Steve Lodge, Personal Finance Editor of our Sunday sister paper. The guide, sponsored by General Accident Life, is available by calling 0500 125888. Or fill in the coupon on page 19.

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

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

    Greece referendum

    Greeks say 'No' to austerity and plunge Europe into crisis
    Ten years after the 7/7 terror attacks, is Britain an altered state?

    7/7 bombings anniversary

    Ten years after the terror attacks, is Britain an altered state?
    Beautiful evening dresses are some of the loveliest Donatella has created

    Versace haute couture review

    Beautiful evening dresses are some of the loveliest Donatella has ever created
    No hope and no jobs, so Gaza's young risk their lives, climb the fence and run for it

    No hope and no jobs in Gaza

    So the young risk their lives and run for it
    Fashion apps: Retailers roll together shopping and social networking for mobile customers

    Fashion apps

    Retailers roll together shopping and social networking for mobile customers
    The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

    Gaping hole at the heart of the European Union

    Treatment of Greece has shown up a lack of genuine legitimacy
    Number of young homeless in Britain 'more than three times the official figures'

    'Everything changed when I went to the hostel'

    Number of young homeless people in Britain is 'more than three times the official figures'
    Compton Cricket Club

    Compton Cricket Club

    Portraits of LA cricketers from notorious suburb to be displayed in London
    London now the global money-laundering centre for the drug trade, says crime expert

    Wlecome to London, drug money-laundering centre for the world

    'Mexico is its heart and London is its head'
    The Buddhist temple minutes from Centre Court that helps a winner keep on winning

    The Buddhist temple minutes from Centre Court

    It helps a winner keep on winning
    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate