Put a little PEP into your portfolio

Personal equity plans offer tax advantages if you can afford to leave funds untouched and are prepared to accept varying degrees of risk
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The Independent Online
For investors prepared to take a gamble on the future performance of world and UK stock markets, personal equity plans (PEPs) offer a tax- advantageous way of doing so.

PEPs were introduced by the Government to encourage wider share ownership and have proved popular, with about pounds 22bn invested in them by the end of last year. The tax breaks apply both to capital gains and income tax. CGT is not charged on the sale of shares held in a PEP, and therefore any increase in value comes free of tax.

Dividends paid are also tax-free. Unlike a Tessa, there is no requirement for the investment to be kept for five years. Investments in PEPs are restricted to pounds 6,000 in any one year, plus up to pounds 3,000 in a single-company PEP.

PEPS normally have one of two characteristics. They are either geared towards producing a regular income or they are committed to longer-term capital growth. In the case of longer-term-growth PEPS, fund managers freed from the constraints of supplying dividend income are able to invest for growth. An income-generating PEP can, however, still provide an ideal vehicle for capital growth if dividends are reinvested.

Tony Marshall, an independent financial adviser with JN Financial Services Limited, says: "At present, a typical income PEP produces a yield of around 3.75 per cent per annum. This income can be rolled up to buy further shares, to this can be added the tax credit on the dividend, worth a further 0.5 per cent a year."

The decision on whether to "PEP up" depends on personal circumstances. If an investor can comfortably afford to leave the funds untouched for some time, and is prepared to accept varying degrees of risk, there is a strong case for PEPs.

There are a large variety of PEPs to choose from, with varying charging structures. These depend in part on the extent to which the investment is actively managed.

In 1995 a new breed of cut-price PEP providers entered the market. They cut some of the costs by tracking the market indexes, usually the FT-SE 100 share index. There is intense competition between providers to levy low charges, with Virgin Direct, Legal & General, Gartmore and HSBC among the cheapest.

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