Investment: Taxing problems - Staying single is a risky business in PEP trades

SINGLE COMPANY PEPs offering the prospect of tax-free investment present several questions. Is it worth getting one? Is it a suitable investment? Which PEP manager and which shares offer the best prospect of a healthy return?

Answers to these questions are easy to understand, but one must remember that a single company PEP is a more specialist investment than a general one.

They need careful consideration. As the end of the tax year approaches, investors appear to be flooding into them. Fidelity says its sales of single company PEPs from the start of the year to 10 February are up 223 per cent on the similar period last year.

But single company PEPs are not suitable for everyone, and they are far less popular than general PEPs, even taking into account this year's rush.

Jason Hollands, managing director of BESt Investment, the financial advisers, says: "Single company PEPs are not appropriate for the vast majority of private investors."

There are two reasons single company PEPs are often unsuitable. First, each year's single company PEP requires direct investment in the shares of only one company. This makes them a risky investment.

If you invest the allowed annual maximum of pounds 3,000, its return will depend entirely on the fortunes of your chosen company. For wealthy investors this may not be a worry: they will have other investments, and the relative risk will be small.

But for most people pounds 3,000 is a lot of money, and investing it all in a single company PEP is a bad idea. Investments should be diversified to spread risk.

Investors also need to remember that shares in single company PEPs should be viewed as long-term investments. You can sell the shares in a single company PEP and switch to another company's shares so long as you do not hold cash for more than 42 days. And some single-PEP providers will offer to manage the investment for you, buying and selling shares in an effort to maximise your return.

But dealing charges and stock market volatility mean you should expect to hold shares for a minimum of five years. Investors looking for a short- term investment should try elsewhere.

The second concern about the suitability of single company PEPs is over the value of the tax breaks that they offer, and whether these outweigh their initial fees and management charges. For some people they will, but for others they will not.

There are two tax savings offered by a PEP: one is on capital gains tax (CGT), and the other is on the tax payable on dividends.

CGT is payable only on capital gains over pounds 6,800 in a year so, for many people, single company PEPs offer no benefit here. They will not have such tax liabilities.

As for dividends, after 5 April changes in the tax laws mean that tax benefits on dividends make a significant difference only for higher rate taxpayers.

Mr Hollands says: "With the cuts in tax credit dividends, single company PEPs are almost certainly inappropriate for anyone who isn't a top-rate tax payer, or who doesn't have capital gains tax liabilities."

Buy if a single company PEP does make sense for you, there are several pieces of general advice. Make an effort to shop around for the best deal. Initial fees and management charges vary considerably from one single company PEP provider to another. To find the best deal, contact several stockbrokers or investment companies offering them.

You will also need to consider whether you want an execution-only stockbroker, probably offering lower charges, or a traditional stockbroker or investment company that offers advice on choosing shares.

When picking shares, think about your priorities. Fred Robinson, a partner at the stockbrokers Killik and Co, says: "Your stock selection will depend very much on how it fits in with your portfolio."

Jim Wood-Smith, head of research at Greig Middleton, says: "The attitude we take towards single company PEPs is that it is best to think safety first. We go for large blue-chip stocks where we are as sure as we can be that people will make money in the long term.

"What we don't do is use single company PEPs as tax-free speculating vehicles. If you take a punt and get it wrong you've lost on your tax break."

The Independent has produced a last-minute "Guide to PEPs". The guide, by Nic Cicutti, this paper's personal finance editor, discusses whether PEP investments might suit your needs, what the tax benefits are - and aren't - and details of the rules.

If you are considering a last-minute PEP, this guide, sponsored by Scottish Widows Fund Management, is for you. Call 0345 678910 for your free copy.

PROMOTED VIDEO
Life and Style
The veteran poverty campaigner Sir Bob Geldof issues a stark challenge to emerging economies at the Melbourne HIV/Aids conference
health
Arts and Entertainment
Benedict Cumberbatch and John Malkovich talk Penguins of Madagascar at Comic-Con
comic-con 2014Cumberbatch fans banned from asking about Sherlock at Comic-Con
Arts and Entertainment
Chris Pratt stars in Guardians of the Galaxy
filmGuardians Of The Galaxy should have taken itself a bit more seriously, writes Geoffrey Macnab
News
Sir Chris Hoy won six Olympic golds - in which four events?
news
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
Lars Ulrich of Metallica performs on the Pyramid Stage at Glastonbury 2014
people
Arts and Entertainment
film
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
video
Life and Style
tech
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Extras
indybest
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Associate Recruitment Consultant - IT

£20000 - £25000 per annum + OTE £40,000: SThree: Computer Futures has been est...

Business Analyst

£300 - £350 per day: Orgtel: Job Title: Business Analyst Rate: £300 - £350 per...

Trade Desk Specialist (Linux, Windows, FIX, Finance, Networks)

£60000 per annum: Harrington Starr: Trade Desk Specialist (Linux, Windows, FIX...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform