Why PEPs top the pops

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The Independent Online
Personal equity plans are now by far the most popular method of investing in unit trusts and investment trusts, thanks to the generous tax incentives first introduced in 1987. Adults can invest up to pounds 9,000 in a PEP each year, and couples can each invest that much.

Up to pounds 3,000 can go into a PEP holding shares in a single company, and up to pounds 6,000 can go into a portfolio of shares, investment trusts and unit trusts. If you like you can invest the full pounds 6,000 into unit trusts and investment trusts, or even into just one trust. The only other proviso is that the rules require the bulk of your PEP be invested in "qualifying" trusts, which are those investing at least half their assets into shares in companies listed on the London or European Community stock exchanges. A maximum of pounds 1,500 can go into so-called "non-qualifying trusts" which would include specialised unit or investment trusts investing in North America, Japan, the Far East or various emerging markets.

Oh, yes, there is one other rule. You can only invest your annual PEP allowance with one "provider", ie a bank, building society, stockbroker or financial manager which offers Personal Equity Plans. But you need not invest this year with the same provider as last year, and you can switch your PEP from one provider to another. Your new provider will offer a cheap transfer deal, of course, although you may well be charged an exit fee by your old provider.

If you invest by way of a PEP, the dividends on your investments are completely free of tax, even if you are a top-rate taxpayer, and if you make a capital gain on the investments by the time you sell, under current legislation, at least, they are exempt from capital gains as well. Better still, you do not even need to declare your PEP income or gains on you tax form, which saves a lot of form-filling. You can also sell your PEPs at any time without losing your tax advantages.

So what's the catch? Well, your PEP provider will levy an annual management charge to cover the cost of his or her expertise. This will usually be 1 or 1.5 per cent of the annual value of your portfolio, and that will swallow a good part of your tax saving, especially if you are only a standard rate or lower rate taxpayer, and also if you are investing in trusts whose main aim is capital growth rather than income.

If you invest in investment trusts you will also be paying the dealing spread on the shares in which they invest, and if you invest in unit trusts most providers will make a 5 per cent up-front charge to cover the "spread" between the price at which you buy and the price at which you can sell. But you will pay charges even if you buy investment or unit trusts direct, and most providers charge the same whether you are in a PEP or not, so you may as well have the tax advantages n

Clifford German

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