What to do with windfalls

Deciding how to make the most of your free shares when a building society such as the Halifax goes public isn't a breeze.
Halifax Building Society's 8 million members will be told how many free shares they have been allocated late this month or early next, the society rather disingenuously announced yesterday. Before then, the Halifax will launch what it calls a share education campaign in the shape of a free booklet to teach its members how to buy, sell and hold shares, and what their options are.

Members who simply want the money rather than the shares will be able to sell them free during the first 10 days after trading begins through the new Halifax share dealing service, which will be launched in June. Those who decide to keep their shares can then opt to hold them free for at least three years in a Halifax Shareholder Account. Initially the shareholder account will be for Halifax shares only, but it will be extended to hold shares in other companies.

The Shareholder Account is not the same as a PEP. Halifax shareholders who want the tax-free advantages of a PEP can put the shares in a Halifax Share PEP, where they are exempt from tax on the dividends and any eventual capital gains. The disadvantage is that the converting building societies will only accept their own shares into a PEP, and investors can only have one single company PEP manager in any one tax year.

Anyone who will get more than one free share allocation this tax year, or has any intention of putting more money in a PEP in the current tax year, would be well advised to look for a manager who will accept shares in more than one company into a PEP. That way, investors can put all their windfall shares into a general PEP, and the beauty is that the Inland Revenue accepts that windfalls are not subject to the normal pounds 6,000 limit on investments in a general PEP.

Several fund managers, including Gartmore, Henderson, Invesco, Mercury, M&G, NPI, Perpetual, Save & Prosper, Singer & Friedlander and Skandia MultiPEP, have already announced that they will allow investors to put windfall shares into a PEP, either on their own, or in some cases alongside other shares, investment trusts and unit trusts.

Some others impose additional conditions. Fidelity will offer a special PEP for windfall shares, but it will not allow other shares to be added. Framlington will accept windfalls only if the investor also holds some Framlington unit trusts in it. Johnson Fry will accept windfalls into most of its PEPs, as long as investors top up their windfalls to the full pounds 6,000 with other investments. Schroders will allow windfalls only into their investment trust PEP.

A handful of managers, including Abbey Life, the Prudential and Exeter Fund Managers, have yet to decide whether to offer special facilities for windfall shares in their PEPs, but the vast majority of PEP managers have already said that they will not or can not accept windfall shares direct into PEPS, although they will cheerfully allow windfall shares to be exchanged for units in their unit trust PEP plans.

Investors should remember that fund managers levy charges on PEP shareholdings. S&P charges pounds 25 a year per plan, for example, while M&G and Perpetual charge pounds 8 a year per share held, and the charges have to be compared with the income tax saved on the dividends. The financial advisers Torquil, Clark are offering readers a detailed guide, called Pepping that Windfall, at pounds 2.50, post-free, from PEP Direct, Freepost WV316, Wolverhampton WV2 1BR.

Meanwhile, investors who are not certain what they want to do should tick the box on their allocation form requesting the building society to send them the actual share certificate. That at least gives them the freedom to choose whether to go for a windfall PEP or swap into a unit trust PEP later. But investors must remember that they have only 42 days from the day they receive their shares to put them into a PEP free of charge. After that, they would have to sell the shares and buy them back inside the PEP and incur the dealing charges involvedn