Money Q&A: Last chance to PEP up

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I've noticed recently that a number of well-known companies have been heavily advertising their PEPs. I have two PEPs taken out in the last few years, but most of my money is in the building society. Is it worth taking out another PEP now if they are to be replaced next year with the new Individual Savings Accounts (ISAs)?

MH, LONDON

PEPs are advertised throughout the year, but there is usually a big sales push from Jan- uary to March as the end of the tax year on 5 April nears. In practice, the deadline has made no difference to many investors with limited funds. They could always use another year's PEP allowance in the new tax year from 6 April.

This year, things are different. In the current tax year you can invest pounds 6,000 in a general PEP and pounds 3,000 in a single-company PEP. But if your money is not invested by 5 April 1999 you lose the allowance. All money invested in tax-free PEPs by that date can be kept in PEPs indefinitely, as well as any money invested in the new ISAs, that then take over. ISAs have different and more complicated investment limits, with an overall pounds 52,000 cap over 10 years. There is a real incentive to invest through PEPs now, if you find the ISA limits too low.

But are the tax benefits of PEPs or ISAs worth paying for? Many investment funds (unit trusts and so on) carry no extra charges if you PEP them. You pay only the charges on the underlying fund. But where PEPs have extra PEP charges, do your sums.

It's only worth paying these charges if they come to less than the tax you save. You'll pay no capital gains tax on PEP investments, but most investors do not make sufficient capital gains to pay capital gains tax. Income tax on dividends is the main tax saving: it's worth more to a higher- rate tax payer.

For basic-rate tax payers the income tax saving is halved next April from 20 per cent to 10 per cent. This tax saving could be less than the extra PEP/ISA charges you may incur.

Pension transfer

A year ago I started a new job and joined the pension scheme. I also belonged to the pension scheme in my old job. Should I consider transferring the old pensions scheme to the new one? Both are final salary schemes.

DS, ESSEX

In theory, the transfer value from your old scheme money should produce the same pension income at retirement as you are giving up in the old scheme and would get from your new employer's scheme. But actuaries for both schemes make all sorts of assumptions about investment returns and inflation, which may, in practice, prove to be incorrect.

The chances are that the new scheme will give your transfer value fewer years' membership, than the years you belonged to the old scheme. This could be due in part to different formulas for working out the pension, for instance, a pension scheme that pays you a 60th of your year's salary for each year of membership is worth more in money terms than one that pays an 80th. There may be other complications. One scheme may be contracted out of the state Serps pension. The other may be paid in addition to Serps, so the basic formula for working out the pension is likely to be less generous.

But even if the two schemes are identical, the new scheme is still likely to offer fewer years' membership. People typically move to higher paid jobs. X per cent of a year's salary in a higher paid job is worth more than X per cent in a lower paid job.

For the transfer value to be worth the same in money terms, you will earn fewer years in the new scheme. But, if you expect to have big pay rises in your new job, perhaps through promotion, your transferred money's real worth will eventually be greater in the new scheme.

Confused? You've every right to be. Get details of the benefits from both schemes. If you cannot decide what is best, consider paying a fee for advice from a pensions specialist. Try the Society of Pensions Consultants on 0171-353 1688.

Write to the personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number; or fax 0171-293 2096; or e-mail i.berwick@independent.co.uk

Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies, or guarantee to answer letters. We accept no legal responsibility for advice given.

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