The portfolio to beat all Peps

Amicable's Personal Equity Portfolio wins the best innovation of the year award in Clifford German's books

First prize for product innovation this year so far must go to Scottish Amicable's Personal Equity Portfolio, which will be on offer from May 1 to June 10. It combines the tax-free attractions of a personal equity plan bigger than all the existing Peps available to date with the ability of a split-level investment trust to channel all the income to the tax-free part of the trust and any capital gains to another.

In effect an investor can put up to pounds 50,000 into the plan, of which pounds 6,000 will go into ordinary shares in a new split-level investment trust, Amicable Strategy Trust, which will be placed in a PEP, and pounds 44,000 into warrants which will be converted into capital shares held outside the PEP.

The management will deduct an initial charge of 4.9 per cent, of which 3 per cent will go in commissions to the independent financial advisers through which the plan will be marketed.

The balance will be invested in equities chosen from the FT-SE top 350 shares, which currently yield an average of about 3.8 per cent net, a fraction less than the top 100 shares.

The whole of the income will be credited to the ordinary shares, however, and can be paid out half-yearly or rolled up tax-free within the PEP element of the fund to generate a return in excess of 6 per cent to higher-rate taxpayers. There will be an annual management charge of 1 per cent.

The capital shares will earn no income and will fall in value if the 350-share index falls during the planned seven-year life of the trust.

Unlike Scot Am's guaranteed PEP there will be no guarantee. But as Scot Am's general manager of product development, Gavin Stewart, who created the fund, points out, there has not been a time since 1975 when the London stock market has fallen over a seven-year period.

In the meantime the fund will be managed to try and outperform the 350 share index. At the end of seven years the trust will be wound up unless 75 per cent of the shares are voted to continue. The capital shares will have first entitlement to the capital, and will receive pounds 50,000 or pounds 44,000 plus the rate of inflation, whichever is the higher.

If the rate of inflation averages 1.85 per cent or less the pounds 50,000 will be payable and there will be some capital gains tax liability.

But in the likely event that inflation is higher the second option will be triggered and the gain will, under current regulations, be tax-free.

Once the capital shares have been paid any remaining capital will be paid out to the ordinary shares and as they are inside the PEP that gain, like the income, will be tax-free.

Scot Am, sponsor of the Barbarians rugby club, has set a ceiling of pounds 1bn on the size of the trust but will be satisfied if it attracts at least a quarter of that. The maximum investment is pounds 50,000 per person and pounds 100,000 for a married couple, but the minimum investment has been scaled down at the request of IFAs to pounds 10,000, of which pounds 1,200 represents ordinary shares and pounds 8,800 the capital shares.

To qualify for the trust investors must not yet have used any part of their 1996/7 PEP allowance. The trust is being marketed through IFAs and applications must be lodged with the Royal Bank of Scotland by June 10.

The new product has taken Scot Am six months to devise. The proposal has been run past the Inland Revenue, which has raised no objection to the concept, although like the guaranteed corporate bond PEP invested in its own shares marketed last year by Legal & General the Scot Am product does appear to strain the Treasury's definition of what is an eligible Pepable investment.

Independent financial advisers are divided over whether there will be a ready market for the product. The income yield will still be significantly lower than what is available on most corporate bond Peps and high-income Peps which medium-sized investors can buy each year, while large investors who will be constrained by the annual limit of pounds 9,000 on new Peps of all kinds already have a wide range of alternative investments open to them at home and abroad.

If, however, the Scot Am product succeeds in tapping a rich vein of investor interest competitors seem likely to follow suit and to try and run the gauntlet of approval from the Inland Revenue to get similar products on the market before the end of the financial year which has just begun.