The extra Pep

Peps may represent the best middle- and long-term investment. Tony Lyons advises on how to choose them

Personal equity plans (Peps) have been a pounds 22bn success story since they were launched by Nigel Lawson in his 1986 budget. If you wish to save for five years or more, Peps will almost certainly be the most tax-efficient investment. Most Peps invest in the stock market, offering an opportunity for your money to earn much more than in a savings account.

The rules are simple. You can invest pounds 6,000 in any tax year (as a lump sum or monthly instalments) in a general Pep - one which invests in several different companies. You can also invest a further pounds 3,000 a year in a Pep which holds shares in just one company. Everyone has an individual Pep allowance, so a married couple can each invest the maximum.

The only exception is that if the money is put into shares or units which are invested outside Europe, the maximum that can be invested is pounds 1,500 per person.

Dividends from shares held in a Pep are free of income tax and you do not have to pay capital gains tax when shares are sold - providing they have been held for more than a year.

The market is dominated by the high street banks, which each have over pounds 1bn in Peps, but they are also marketed by established fund managers, insurance companies and newcomers to the personal finance industry.

Charges have become fiercely competitive. The initial charge for setting up a plan varies from nil to 5 per cent. Annual management charges are usually between 0.7 and 1.5 per cent. All Peps levy dealing charges for buying and selling shares, and all incur stamp duty of 0.5 per cent for share purchases. Some managers also impose exit charges if the plan is cashed within 5 years.

Basically there are four different types of Peps available:

Single-company Peps are for those who want to invest up to pounds 3,000 a year in an individual company. Much of the money invested comes from people who want to share in the future success of the business they work for. Employees can often transfer shares they already own into a single- company Pep free of charge. Otherwise, normal transfer charges are applied.

Self-select Peps are usually offered by stockbrokers and independent financial advisers. The plan manager invests in a selection of funds offered by other management groups, or a basket of qualifying shares and units, for the long term. The manager may offer advice on which stocks to invest in, for which there is usually a charge. If, however, you are a more sophisticated investor and know the ways of the stock market, you can select your own portfolio.

As with all types of Pep, the dividends can either be taken out or, more commonly, reinvested in the portfolio. You can be as active as you want. Just as with any ordinary share investment, stocks can be changed whenever you want, but you will have to pay the dealing costs.

Managed Peps are available from a wide variety of management groups, most commonly unit trust groups and investment trusts. Instead of a selecting a portfolio of shares, investors use their Pep allowance to invest in the chosen fund. Usually, the funds reinvest the tax-free income to buy additional units and so build up the value of the fund.

The most common investment vehicle to date has been UK growth funds. But tracker funds which invest in the stocks which form the FTSE 100 Index are proving increasingly popular, as few funds seem to out-perform the Index in the long term. For a small fee, some plan managers are beginning to offer a guarantee that over 5 years there will be no depreciation in capital even if the underlying investments fall during that time.

Most management groups now offer their Pep plans to people who want to save regularly basis. The main unit and investment trust group usually ask for a minimum investment of between pounds 25 and pounds 50 a month.

Corporate bond Peps - for those who are averse to risk and want an income higher than a building society deposit account - have been available only since last year, and invest in a variety of bonds, preference shares and convertibles that pay a fixed dividend each year, with a lower risk to capital than ordinary shares and units.

Most investors use corporate bonds to supplement income, usually in retirement, and there are now more than 60 different ones on offer. According to the Association of Unit Trust and Investment Trusts, the average corporate bond produced an income of 7.1 per cent tax free over the past year, nearly double a conventional deposit account, and the capital has remained intact

News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
Sport
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
film
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
News
people
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
News
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
Voices
The new dawn heralded by George Osborne has yet to rise
voicesJames Moore: As the Tories rub their hands together, the average voter will be asking why they're not getting a piece of the action
Sport
Dejan Lovren celebrates scoring for Southampton although the goal was later credited to Adam Lallana
sport
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
Finacial products from our partners
Property search
Sell it with flowers: competition is 'intense' for homes with outside spaces

Gardens add a tenth to the value of your home

A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.

Spectators at the Isle of Wight music festival watch the World Cup on the big screen. Betting promotions were a feature of the tournament
Lenders have been accused of persuading vulnerable people to borrow expensive credit

Payday loan firms accused of bombarding vulnerable people with nuisance phone calls

Payday loan firms have been accused of bombarding financially vulnerable people with nuisance phone calls, after a debt charity reported that a third of its clients were plagued by the messages.

The foundation proposed that the Government sets up a scheme to help people avoid losing their homes

Mortgages: 'Homeowners could trade down to shared ownership to defuse rate rise timebomb'

A plan to defuse a “mortgage debt timebomb” when interest rates rise is published today amid warnings that 2.3m households could struggle with their repayments.

Current accounts are too costly and confusing, says CMA as it announces investigation into Britain's biggest banks

Competition regulator to investigate market where it's hard for customers to make comparisons and the big banks' charges can be set too high
All the signs have been pointing up for buy-to-let, but there are clouds on the horizon

Buy-to-let: is it a boom or a bubble fit to burst?

People borrowing to be landlords could face the same restrictions as homebuyers, with MPs voicing fears that property speculation may be overheating the market

Moment of truth for payday lenders: Watchdog plans to curb cost of short-term loans

The chief of the City watchdog, Martin Wheatley, spoke exclusively to The Independent's Simon Read about its attempts to control the worst excesses of unscrupulous high-cost credit companies

Consumers given power to choose a green deal

How would you like to be able to choose how your electricity is made and even where it come from? It may sound futuristic and fanciful but the independent supplier Co-operative Energy has made it a reality this week.

'Scrap the trap': calls for change grow as banks are told to play fair with loyal savers

City regulator says existing customers suffer worst rates

Motor insurers divided on proposals for whiplash ban

MPs want medical evidence for claims. Will this bring higher premiums?

British Gas repays £1m for mis-sold deals

British Gas was yesterday forced to pay back £1m to its customers after mis-selling them energy deals.

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

    Senior Risk Manager - Banking - London - £650

    £600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

    The benefits of being in Recruitment at SThree...

    £18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

    Test Analyst - UAT - Credit Risk

    £280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

    Trainee Recruitment Consultants - Banking & Finance

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

    Day In a Page

    Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

    The BBC’s wolf in sheep’s clothing

    What will Evan Davis be like on Newsnight?
    Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

    Finding the names for America’s shame

    The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
    Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

    Inside a church for Born Again Christians

    As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
    Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

    Olivier Rousteing is revitalising the house of Balmain

    Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
    Cancer, cardiac arrest, HIV and homelessness - and he's only 39

    Incredible survival story of David Tovey

    Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
    Backhanders, bribery and abuses of power have soared in China as economy surges

    Bribery and abuses of power soar in China

    The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
    Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

    Highland terriers steal the show at opening ceremony

    Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
    German art world rocked as artists use renowned fat sculpture to distil schnapps

    Brewing the fat from artwork angers widow of sculptor

    Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
    BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

    BBC takes viewers back down memory lane

    The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
    Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

    Nicolas Cage shines in low-budget drama Joe

    Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
    How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

    Make your own ice lollies and frozen yoghurt

    Think outside the cool box for this summer's tempting frozen treats
    Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

    Fiesta is UK's most popular car of all-time

    Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
    10 best reed diffusers

    Heaven scent: 10 best reed diffusers

    Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
    Commonwealth Games 2014: Female boxers set to compete for first time

    Female boxers set to compete at Commonwealth Games for first time

    There’s no favourites and with no headguards anything could happen
    Five things we’ve learned so far about Manchester United under Louis van Gaal

    Five things we’ve learned so far about United under Van Gaal

    It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little