The monthly way to wealth

Tax-free corporate bond Peps are ideal for parents saving for their children's higher education
Don't look bored and try to change the subject if someone tells you they are putting money into a corporate bond Pep. Sit up and take notice, because they are probably earning more than 7 per cent tax free.

This means that their savings are growing at twice the rate of inflation - with a lower level of risk than is involved in most Peps and other investments linked to the stock market.

That's because these Peps don't put your money into shares, they put it into fixed-interest bonds which are issued by leading UK and international companies such as Tesco and BT to finance the expansion of their business.

Corporate bond Peps are a recent arrival in the investment market, but in less than 18 months they have collected more than pounds 1.4m from about 250,000 savers who are attracted by the tax-free earnings. You can buy them from many of the major fund managers, including high street names such as Abbey National and particularly the Woolwich, which has targeted savers whose first Tessas are maturing, attracting more than pounds 130m in its first six months.

The top-performing corporate bond Pep over the past 12 months is Abtrust's fixed-interest fund, while other strong participants include offerings from Virgin, M&G and Fidelity.

But before you form a queue, there are a few points worth considering. These are investments that generally offer a steady, tax-free income rather than spectacular capital growth. Although the risk is lower than with shares, it is still there. The wealth warning still applies: the value of your investment and income earned can go down as well as up. And because you are investing your money in a managed fund, you have to pay the manager to look after it. Look carefully at the charges.

However if you do think that corporate bond Peps are right for you, remember that many of them offer monthly savings plans as well as taking lump sums. You can invest in the top-performing Abtrust fund, for example, for as little as pounds 25 a month. Increasing numbers of unit trusts and investment trusts offer regular savings plans packaged in a Pep. This ensures that all the gains on your investment are paid to you free of tax - which adds up to a healthy "bonus" on your investment.

Regular saving is not just about building a nest-egg for your own enjoyment. One of the increasingly important roles for long-term savings plans is to fund children's higher education. As the value of student grants declines, parents face bigger bills. According to a recent survey by Asda, the supermarket chain, it costs more than pounds 17,000 to put a student through a typical three- year university course. In response, the fund manager Barclays Unicorn is offering its tax-free savings plan as an ideal way to meet the cost. Parents who had children in 1980 and invested the child benefit payments - pounds 19 then, and pounds 43 now - every month with Barclays Unicorn General Trust would now have a lump sum of pounds 18,300.

But to illustrate the benefit of tax-free status, had the Trust been available as a Pep, that same investment of child benefit over 16 years would now be worth more than pounds 20,000

Comments