Investing For Growth: Fertile ground for your funds

ANYONE who has been investing in PEPs since they were introduced in the 1987 Budget could easily have amassed a portfolio worth more than pounds 100,000.

A PEP is best suited to taxpayers, especially higher-rate taxpayers. This is because until April, when PEPs are replaced by individual savings accounts (see article below), investments within a PEP are free from income and capital gains tax.

After 6 April the tax rules for share dividends will change. Until then, PEP managers will be able to reclaim the 20 per cent advanced corporation tax (ACT), which is basically the tax paid by companies on the dividends they distribute to shareholders. For the next five years, only half the ACT will be reclaimed for PEP holders and from 2004 you will get no tax rebate at all. Income from equities will no longer be tax free.

This change will affect all companies paying dividends. The better news is that companies geared to fast growth do not pay large dividends.

Everyone is allowed to put up to pounds 6,000 in a general PEP and another pounds 3,000 in a single-company PEP.

Husbands and wives have separate PEP allowances, so this means that a couple can invest up to pounds 18,000 before the end of the tax year.

You can pick individual shares that you think will grow in value over the years and put them into a self-select PEP, but if you are new to the stock market you should choose one of the plans now offered by more than 100 fund management groups. These invest in unit or investment trusts that allow you to share in well-diversified portfolios run by professional managers.

You can put up to the maximum amount in any fund that invests in the UK or the European Union. If you want a fund that has more than half its investments outside the EU, you can only invest up to pounds 1,500.

"If you want out-and-out growth," says Kim North, an independent financial adviser at Pretty Financial, "you could look at some of the smaller funds. But as these can be very volatile you may want to concentrate on the big fund management names. Make sure the aims and investment philosophy of the fund concur with yours."

If you do not already have a PEP, you should consider "a large, mainstream fund that invests in large British companies", advises Graham Bates, of Bates Investment Services. "Look for a good solid name with a good performance record. If you already have PEPs that invest in the UK then look to diversify into European funds. While you should look at charges, performance is more important. Try to pick a fund that does consistently well year in, year out."

Mr Bates' research found that only five funds in the top 30 PEP performers for the five years to 1993 are still in the top 30 for performance over the last five years. These funds are Fidelity European Opportunities, Royal & SunAlliance European, Scottish Widows European, Lazard European and Jupiter Income.

You should also review your growth portfolio annually. Investment fashions change as often as fund managers, and a fund that you Pepped six years ago could have changed significantly for the worse.

We will be in a low-inflation, low-interest rate economic environment for the foreseeable future, so you should look for overall growth - don't ignore income. Some income funds, such as corporate bond funds, will have a home within your growth PEP and ISA portfolio. You don't have to take the income as most of them allow you to reinvest it and use it to buy extra units. This will have the effect of compounding any underlying growth.

Many independent financial advisers pick growth funds that take a bottom- up approach - the managers choose the companies before they look at the sectors or countries where they are based. UK and European funds run by groups such as CGU, Fidelity, Invesco, Jupiter, Gartmore and Newton fall into this category.

If you are worried about getting your timing wrong or nervous about the direction the market is heading, you could consider making regular payments into a fund. As the end of the tax year approaches, most PEP managers will only accept lump sums. If you can set up a regular investment plan you can convert it to an ISA in April at no extra cost and carry on paying into the fund. By putting money into equities on a regular basis you will smooth out the highs and lows in the market.

Contacts: Bates Investment Services - for a performance review pack for your PEP portfolio, call 08000 688655.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
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

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent
Markus Persson: If being that rich is so bad, why not just give it all away?

That's a bit rich

The billionaire inventor of computer game Minecraft says he is bored, lonely and isolated by his vast wealth. If it’s that bad, says Simon Kelner, why not just give it all away?
Euro 2016: Chris Coleman on course to end half a century of hurt for Wales

Coleman on course to end half a century of hurt for Wales

Wales last qualified for major tournament in 1958 but after several near misses the current crop can book place at Euro 2016 and end all the indifference