Find the right fund and then look at charges

In The 10 years since personal equity plans were introduced by then Chancellor Nigel Lawson, there have been a number of changes in the way they're marketed. As plans have grown in popularity and more managers have appeared, the marketing has become more sophisticated.

It's obviously been a success as last year the amount of money flowing into PEPs reached almost pounds 1bn a month during the critical period before 5 April, the end of the tax year.

Two other factors helped the boom: poor-paying building society accounts led many savers to seek better returns elsewhere, and confidence in the stock market returned. But PEP managers played their ace card by introducing price cuts.

The popular Virgin Direct Tracker PEP was launched last year purely on the basis of its simplicity (it just tracks the index of the UK's biggest shares) and its lower price (an annual fee of 1 per cent).

Other PEP managers followed with similar deals. Legal & General, for instance, was quick to reduce the annual fee on its index-tracker fund to 0.5 per cent and scrapped its initial charge.

But investors flocking to take advantage of the new-style low-charge PEPs could be making an expensive mistake. There's an oft-quoted adage that you get what you pay for - and in the investment world the saying has some merit.

That is why Perpetual, the most popular PEP manager, can afford to maintain its front-end charge of 5.25 per cent: seasoned investors are prepared to pay the price for the potentially greater rewards. There are, of course, no guarantees with this kind of investment, but Perpetual's consistently good track record is attractive. In fact, Perpetual is prepared to link part of its fee to performance and will receive 10 per cent of the outperformance of its funds compared to the FT-SE All Share Index.

Performance is the key word here. But it is one that can be missed by novice investors. Their mistake is to think of PEPs in the same way as Tessas or other savings opportunities.

When it comes to investments, individuals have to make several decisions before handing over their cash. Are you prepared to take a gamble with your money in return for potentially higher rewards, or do you want to ensure that your capital is completely safe? In other words, are you cautious or aggressive when it comes to making money? Your answer will help give you an idea of what kind of PEP you should choose.

You must also consider whether you want income or growth from your investment, and whether you are investing for a particular purpose, such as the children's education or for extra money in retirement.

Once you know some basic financial facts about yourself, it's a question of marrying these with the right investment. If you are prepared to take a large risk it could be worth putting all your cash in one share, for instance. If you don't like the potential downside of that strategy but like the idea of investing in the stock market then you could choose a collective investment, such as a unit trust or investment trust. If you want to minimise the risk then you could be looking at corporate bonds or convertibles.

All these options are available through a PEP, which has simply become a tax-efficient wrapper for different forms of investment. It's the underlying investment you should be considering, not the marketing spin with which PEP managers try to dazzle you.

Having decided what kind of investment you prefer, you can look at PEP charges. It's true that if you make a mistake and pay too much in charges, it could negate the tax advantages of having the PEP in the first place.

But five years down the line, you could regret going for the cheaper option - and missing out on the opportunities offered by the more expensive specialist funds.

Arts and Entertainment
Armstrong, left, and Bain's writing credits include Peep Show, Fresh Meat, and The Old Guys
TVThe pair have presented their view of 21st-century foibles in shows such as Peep Show and Fresh Meat
Arts and Entertainment
Keys to success: Andrew and Julian Lloyd Webber
arts + entsMrs Bach had too many kids to write the great man's music, says Julian Lloyd Webber
footballMan City manager would have loved to have signed Argentine
Arts and Entertainment
Hand out press photograph/film still from the movie Mad Max Fury Road (Downloaded from the Warner Bro's media site/Jasin Boland/© 2014 Warner Bros. Entertainment Inc.)
films'You have to try everything and it’s all a process of elimination, but ultimately you find your path'
Arts and Entertainment
Imelda Staunton as Dolores Umbridge in the Harry Potter films

New essay by JK Rowling went live on Pottermore site on Friday


Top Gear presenter is no stranger to foot-in-mouth controversy

Russia Today’s new UK channel began broadcasting yesterday. Discussions so far have included why Britons see Russia as ‘the bad guy’

New UK station Russia Today gives a very bizarre view of Britain

ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Keira Knightley and Benedict Cumberbatch at the premiere of The Imitation Game at the BFI London Film Festival
filmsKeira Knightley tried to miss The Imitation Game premiere to watch Bake Off
Enner Valencia
footballStriker has enjoyed a rapid rise to fame via winning the title with ‘The Blue Ballet’ in Ecuador
Arts and Entertainment
A top literary agent has compared online giant Amazon to Isis
arts + entsAndrew Wylie has pulled no punches in criticism of Amazon
Arts and Entertainment
Charlie Sheen said he would

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

The benefits of Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Finance Assistant - Part time - 9 month FTC

£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

Marketing Manager

£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

Day In a Page

Bryan Adams' heartstopping images of wounded British soldiers to go on show at Somerset House

Bryan Adams' images of wounded soldiers

Taken over the course of four years, Adams' portraits are an astonishing document of the aftermath of war
The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

Paul Scholes column

Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities