Investing for growth: PEPs have yet to pop their clogs

Don't write them off too quickly: there's still plenty of life left in personal equity plans, says David Prosser

IT SEEMED like curtains for personal equity plans when Geoffrey Robinson, the Paymaster General, announced last year that the Government would launch individual savings accounts (ISAs) in April 1999.

But don't write off PEPs just yet. You still have two years to take out new ones - in the current tax year and in 1998-99.

In fact, most investors who already have them will benefit from taking advantage of these opportunities. For starters, the majority of existing investors do not have total assets worth more than pounds 50,000 - the maximum you will be able to transfer into an ISA from existing PEPs in 1999 under the outline proposals.

Rachel Medill of M&G, one of the UK's largest PEP providers, says: "For people who are unlikely to have pounds 50,000 of assets by 1999, there is absolutely no reason not to invest in a PEP. You will get the tax breaks and be able to roll them over in full."

It is worth remembering what those tax breaks are exactly. All income paid on investments within a PEP is tax free, no matter what rate of tax you usually pay. Capital growth on investments in PEPs is tax-free too, whenever you sell the assets.

However, even if you have got pounds 50,000 or more of assets tied up in a PEP, it may still be worth taking out new plans. True, you should be prepared to lose the tax breaks on the excess assets in 1999, but you will enjoy tax -free income and capital gains until then.

A saver who uses PEPs to shelter investments from tax until 1999 might save a surprisingly large sum, M&G claims. The company's figures show that a higher-rate taxpayer subscribing pounds 6,000 to a PEP might save up to pounds 120 a year in income tax alone.

If, however, you invest in PEPs as part of a mortgage or pension arrangement and expect to amass well over pounds 50,000 (or have already done so), you should take advice on your options now.

Of course, even today, not everyone benefits from PEPs. Non-taxpayers, for example, save nothing by shifting assets into a plan. And if capital gains tax is not a worry for you - you can make pounds 6,500 in gains in the 1997-98 tax year without incurring the tax - the question of whether to PEP can be tricky. This is because some, though by no means all PEPs, carry extra charges over and above those for investing in the underlying assets.

If the money you pay in extra PEP charges each year is more than the tax you save, the PEP is a waste of time.

There are several different types of PEP. If you are investing for growth through a collective investment vehicle such as a unit or investment trust, your fund manager almost certainly offers a PEP option. Unit trust PEPs normally carry no extra management charges on top of those of the underlying fund.

Alternatively, if you are managing your own investments, such as a portfolio of shares, a self-select PEP is your best bet. As the name implies, self- select PEPs are for investors happy to pick their own investments, rather than paying a fund manager to do the job. There are many self-select plans to choose from, some of which are very cheap, but they all carry some extra plan charges.

In addition, all investors are entitled to a single company PEP allowance worth pounds 3,000 on top of the pounds 6,000 general PEP. You can only hold the shares of one company in a single company PEP, though you can change company later. However, you cannot put unit or investment trusts into a single company PEP.

Finally, remember that you can only take out one general PEP and one single company PEP in any one tax year. So if you don't use this year's PEP allowance before 6 April 1998, you will lose it forever as you will not be able to take out two PEPs in the 1998-99 tax year, in the run- up to ISAs.

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