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.

Start your day with The Independent, sign up for daily news emails
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: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test
Tour de France 2015: Twins Simon and Adam Yates have a mountain to climb during Tour of duty

Twins have a mountain to climb during Tour of duty

Yates brothers will target the steepest sections in bid to win a stage in France
John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy