Calculated risk that raises your tax-free limit

PERSONAL EQUITY PLANS PEPs will be one destination as up to pounds 15bn in maturing deposits seeks a new home from January

INVESTORS can boost their overall tax-free limit to pounds 9,000 a year by investing in a single-company PEP on top of using their annual general PEP allowance.

Up to pounds 3,000 a year may be invested in a single-company PEP, which can protect shares in one company from income or capital gains tax. This option was first introduced by the Government three years ago to encourage more widespread share ownership among the public.

The investor can choose which share to buy, or can pass over the responsibility for stock selection to a professional investment manager, although this tends to be more expensive.

An investor who wants to put more than pounds 3,000 into one stock could choose to invest in a corporate PEP. As in a general PEP, the maximum investment allowance is pounds 6,000 a year, but corporate PEPs often benefit from charges subsid- ised by companies to encourage loyalty among private sharehold- ers. Hanson has been offering a corporate PEP since 1991 and now has just under 3,000 investors. Jonathan Azis, company secretary at Hanson, says: "I think it is a very good service for our shareholders and allows them to take advantage of both the PEP tax allowances and investing in Hanson."

However, independent financial adviser Chase de Vere Investments says the corporate PEP structure is not regarded as being particularly flexible, as the investor is unable to switch out of a particular share if market conditions change. It is regarded as more suitable for the specialist investor with a large portfolio of shares and other investments.

Single-company and corporate PEPs are most suitable for people who have obtained shares through a company scheme. Although shares normally must be sold and repurchased by the PEP manager to realise any capital gains and enable their transfer into a PEP, this process is not necessary for shares acquired through a profit-share scheme. Since 1992, the Inland Revenue has allowed the direct transfer of such shares into a PEP, so long as the transfer is done within 90 days of receiving them.

An investor could, of course, sink his or her entire pounds 9,000 tax-free allowance into one company. But Graham Hooper, investment director at Chase de Vere, says: "The risk goes up quite substantially when you invest in just one share, and being able to pick the one company which is going to do well, rather than spread the risk among a number of companies, is very hard." He says it is normally only worth considering a single company PEP if your general PEP allowance has been fully utilised.

The risk can be limited by building up a range of separate stocks, one each year, in a number of blue-chip companies. More than 100 companies run single company PEPs. The latest Inland Revenue figures show that there is now some pounds 2bn invested in 630,000 plans.

Bradford & Bingley is the biggest manager of such schemes, running about 70 plans for companies including ICI, BP, Tesco and Allied-Domecq.

Because single-company and corporate PEPs tend to be invested in just one stock, even those that are not subsidised are usually cheaper than other PEPs investing directly in shares, because there are fewer dealing charges and only one set of dividends to be processed. Many PEP managers do not make any initial charge, or levy a flat fee of about pounds 10, and the annual management charge is on average just 0.5 per cent. Many stockbrokers will also cut their charges if you buy a single-company PEP with a general PEP.