PEP talk for those tempted by bigger pensions

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The Independent Online
THE TAX year ends on Friday, which means that this really is your last chance to take up this year's PEP allowance.

Inevitably, people will have been put off by the stock market's recent jumpiness. And for many people that hesitation is understandable. After all, you will still be able to buy a PEP in the new tax year as soon as the market looks less vulnerable.

But there is at least one group of people that should seriously consider the virtues of PEPs this week. These are people - in particular the relatively young - in company pension schemes who are thinking of making last-minute additional voluntary contributions (AVCs) to the bolt-on extra pension plans offered by employers. The tax relief on these cannot be carried forward into the new financial year and can seem an important tax break to take up. But there is much to be said for putting the money into a PEP instead.

AVCs offer tax relief at your highest rate on your contributions, their value grows tax-free, the money can only be got back in the form of a drip-fed pension when you retire, and this pension is subject to income tax.

PEPs, by comparison, offer no upfront tax relief, but all investment profits and income are tax-free, and these can be cashed in at any time.

One concern for AVC buyers is that income tax rates might be higher in retirement than they are now, offsetting the kicker of upfront tax relief. But the much greater flexibility of the PEP is probably the more persuasive point.

In general, you should only put money into PEPs that you can afford to leave alone for at least five years - to give yourself the best chance of benefiting from the greater potential of the stock market as a home for your savings.

But PEPs at least still give you the option of taking a tax-free income from day one, or getting your money back at any time if you need it for holidays or other big-ticket items.

And my recommendation for PEP buyers? Legal & General's Index-Tracking PEP. It is the cheapest of its kind and should deliver what it sets out to - stock market performance. This, in turn, is likely to put most other PEPs to shame over any reasonable investment period. Buy it from a discount broker such as the London-based Chelsea Financial Services and you will get it even cheaper. The minimum investment, however, is a chunky pounds 3,000.

MORE power to the Your Money pages. Following our look (17 December 1995) at the problems of an offer to holiday makers in Tenerife and Majorca to save money by remortgaging while getting a timeshare thrown in for free, the Office of Fair Trading has reported it is "minded to revoke" the credit licence of the broker involved, Leicester-based Mortgage Advice Centre. The OFT is prepared to listen to evidence from the firm that it should retain its licence, but if it decides against the broker, the broker will be kicked out of the mortgage business.

The key problems we identified were that attractive quotes presented to holiday makers - saving them money overall - turned out not to be as good as they had first seemed, and that the selling took advantage of slacker consumer protection in Spain and its holiday islands.

Your Money welcomes letters on "nasties" inflicted on consumers by financial firms. We cannot guarantee we will be able to investigate each one, nor can we reply individually (so please do not enclose anything you want returned). But all letters will be read, relished and, where appropriate, used as research for articles.

Write to: Steve Lodge, Personal Finance Editor, Independent on Sunday, One Canada Square, Canary Wharf, London E14 5DL.