Do the PEP quickstep

They are being replaced in weeks, but personal equity plans can still make sense.
There are now just two months left in which to take out a personal equity plan. Time is running out before they are replaced in April by individual savings accounts.

But in view of the volatility of the stockmarket, if you haven't already invested in a PEP in the current financial year, should you do so now?

Certainly, if you are a taxpayer, especially if you pay higher rate tax, the answer is yes. Any financial adviser will tell you that PEPs are for long-term investors, those prepared to wait five years or longer before cashing in. Over almost all five-year periods since the end of the First World War, equities have outperformed all other homes for investment. The ability to shelter pounds 6,000 in a general PEP and pounds 3,000 in a single- company PEP, free of capital gains tax, and to receive back half the income taken in tax after 5 April, is very worthwhile.

It used to be that all PEPs were free of income tax, but the rule change in the last budget will halve the advanced corporation tax - the tax charged on company profits - that can be reclaimed to 10 per cent for five years. After this year, PEP managers will not be able to reclaim any of this income for you.

While this may make PEPs marginally less attractive, it still makes them an ideal home for long-term investment.

However, even taking a long-term view, should you be investing in equities with many analysts expecting share prices to fall? "Don't worry too much about timing," says Ann Davis of Fidelity. "Obviously it is better to buy when prices are low, but leave the timing to the professionals, the fund managers."

"Never try to second-guess the market," advises Roddy Kohn, of Kohn Cougar, independent financial advisers. "Just a couple of years ago, many were saying that the UK market was too high when the FTSE 100 was standing around the 3,400 level. We all know what happened since then."

At the moment, the short-term risks are higher than usual. So decide what type of investor you are. If you are prepared for a high risk, then you should not delay your purchase of PEPs in the hope that prices will drift lower. You might as well plunge into equities now.

Already many of the leading groups are making tempting offers. M&G, for example, will give you as much as pounds 200, while other groups, such as Mercury, will cut their initial charges by 2 per cent.

It is not the time to be splashing out on emerging market investments, even if they may show strong recovery later on. It is better to concentrate on the UK and Europe. The latter is one of the few sectors favoured by most advisers, getting a boost as it will from the recent introduction of the euro. To capitalise on this, Scottish Widows has just launched a new Euroland Trust that can be "Pepped". This will concentrate on the 11 members of the EU's monetary union "which has a population greater than the USA, but [whose] stockmarkets are undercapitalised by comparison," says Jamie MacLeod, of Scottish Widows Fund Management. The group believes that equity investment will increase in appeal and that continental pension funds, with a much larger single, home market, will be investing more in shares than they used to. And to entice new investors, the initial charge has been reduced from 5 to 3 per cent during the introductory offer period.

If you are more risk averse and worried about where share prices are heading, then there are a number of protected funds available from groups such as Close and Barclays B2. One of the most popular is also from Scottish Widows. Called the SafetyPlus PEP, the underlying unit trust grew 41 per cent to pounds 202m in the last quarter of 1998. While its price can be raised at any time, it can only be reduced once a year. When you buy, you know that during the coming year, the minimum it will be worth is 95 per cent of your PEP investment.

For anyone needing income, or who wants to take minimal risks, corporate bonds should be considered. As they invest in government gilts and loan stock issued by the best British companies, the income generated remains tax free. Instead of taking the income, you can accumulate it within the PEP. But remember, as these are not equity investments, they are likely to show lower growth rates over the long term.

Don't forget that so long as you invest your PEP money before 5 April, you can always change the investment vehicle later on. While no new money will be allowed into PEPs after that date, transfers will still be allowed. This means that you can invest in a low-risk PEP now; if markets settle or you feel less nervous about them, change the underlying fund later on. Most transfers within the same management group are usually done free of charge or for minimal costs, although these may be higher if moving to a new management group.

The Independent is offering readers a free "Guide to PEPs", sponsored by Scottish Widows Fund Management, with advice on the types of PEPs available, charges, and a list of leading PEP managers and numbers. Call 0345 678910 to get your free copy.