What's the Deal?: Will the Election PEP win your vote?

The second of a series that analyses tempting financial offers and shows what the catches are
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The Independent Online
The offer:

"Election PEP returns 140 per cent of stock market growth. So it is not just for conservative investors."

A personal equity plan from Legal & General with a number of seemingly attractive features: the promise of stock market growth plus a bonus of 40 per cent of that growth after five years; the safety net of your money back if the stock market falls over this period; and a further pledge to protect you against crashes in the run-up to the general election and if a Labour government should trigger a crisis of confidence among investors.

As with all personal equity plans all profits are tax-free. Unusually you can also invest up to pounds 9,000 in this PEP, instead of the usual pounds 6,000 limit.

What is the idea?

Much like many other stock market-growth-or-your money-back investments, it is aimed at the cautious who are worried about losing money. But this PEP also offers an added reassurance to encourage you to use up your PEP allowance this tax year, instead of waiting until shares look cheaper. L&G is trying to calm the fears of those who are thinking of buying a PEP before the 5 April deadline but fear they might be investing just before prices fall. The stock market is at an all-time high.

How does it work?

The 140 per cent of stock market growth (or your money back) bit is fairly straightforward. After five years, say the stock market has grown by 20 per cent - you get 1.4 times this return, or 28 per cent (plus your original money). If the market has not risen you just get your money back.

The other protection element works like this. Instead of you choosing the best time to put your money into the stock market, your money (which must be with L&G by 21 February) buys in at the average level of the stock market over the following year. This means that if the market should fall from its high levels you stand to buy your shares more cheaply.

There is the same averaging mechanism at the end of the five-year investment period - when another general election could unsettle the stock market. Instead of your investment maturing on a specific date when shares might have just fallen, the "end price" you get is the average level of the stock market over the previous year.

What is the catch?

There are a number: 140 per cent of the stock market's growth might sound attractive but you do not get any dividends. So while you are getting a bonus of 40 per cent of the stock market's growth, whether this works out to be more than the dividends you might otherwise get depends on how shares perform. The better the stock market does, the more attractive the bonus looks compared with the forgone dividends. But on average, in the past, you would have been better off with the dividends.

The averaging could mean that you buy in at a cheaper level and sell out at a higher level, so boosting your returns. But equally, the averaging could reduce returns.

The money-back guarantee, is unlikely to be worth much; it is rare that the stock market is down over a five-year period. Furthermore, all these features depend on your holding the PEP for the full five years. If you want to cash in before then, you may get back less than you put in.

One final caveat. The Revenue might not like this PEP. If you invest pounds 9,000 you will be using your pounds 3,000 single company PEP allowance as well as your pounds 6,000 general allowance. The idea of a single company PEP is that you invest in a single company, not in a guaranteed investment scheme which uses a loophole to qualify as a general and as a single company PEP.

Conceivably such loopholes could be closed retrospectively, forcing investors to withdraw their money.

So should I buy it?

Jason Hollands, of Best Investment, says the Election PEP is quite attractive to the ultra-cautious saver or to someone who just wants to use a single company PEP allowance but who does not fancy investing in a single trading company.

The point about the spirit of the PEP rules could prove important. Mr Hollands says: "We thought [PEPs of this kind] would be knocked out in the last Budget."

Further, with all these growth-or-your-money-back products there is no free lunch. You may do well, but over the longer term you should be better off being exposed to the ups and downs of the stock market.

Legal & General itself has a very good value Index Tracker PEP that would suit many PEP investors, though it offers no protection from any falls in the stock market.

The minimum investment in the tracker, which has no fixed investment term, is pounds 3,000. The minimum investment in the Election PEP is also pounds 3,000. L&G is on 0171 528 6770.

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