The Virgin-branded PEPs are to be launched in a few weeks, and will be available for sale over the telephone in a joint venture with Norwich Union.
Who would have thought back in 1986, when Nigel Lawson in his Budget came up with a new form of tax-free investment, that PEPs would ever be marketed in this way? Buying a PEP may not be a sexy way to spend money, but Virgin's venture suggests at least that there may be many people who are interested.
Successive chancellors have extended the rules for PEPs beyond Mr Lawson's original proposal, so that today the scheme offers an exceptionally generous escape route out of the income tax and capital gains tax net. Someone who has used their full PEP investment entitlement each year since January 1987 and who has been fortunate in their choice of investment could now find themselves sitting on a six-figure sum, completely tax-free.
The basic rule is straightforward: each taxpayer is entitled to invest up to £6,000 a year in a general Personal Equity Plan, and a further £3,000 each year in a single-company PEP. These limits remain unchanged for the coming tax year, but Kenneth Clarke did announce plans in the November Budget to extend the types of investments that qualify for PEP status. In future, some kinds of corporate bonds, convertibles and preference shares will for the first time be able to be included in a PEP portfolio.
What sounds like a technical rule change could turn out to be a significant concession, and already the industry is gearing up for an enthusiastic marketing spree. "There's a lot of eager anticipation from both product providers and clients," says Robin Bloor, a director of Chase de Vere Investments, the independent advisers .
Up to now, corporate bonds have been something of an investment backwater, with only a relatively small retail market in them. Like gilts (government bonds), corporate bonds are normally issued with a fixed rate of interest and a maturity date, on which the company undertakes to repay the investment at its original par value. Also like gilts, these bonds are traded. This means the market price may at any time be above or below the par value, so the actual yield may be greater or less than the notional rate of interest.
Since they are issued by companies, corporate bonds are riskier than gilts, though potentially the yields are higher. Corporate bonds are, however, less risky than straightforward equities. This is true also of convertibles (a type of corporate bond that gives the holder the opportunity to convert fixed-rate stock into shares) and preference shares (where holders have priority over ordinary shareholders for dividend payments).
"Being able to downgrade the risk on PEPs away from pure equity investment will make them more attractive, and in the longer term this will greatly increase the market," says Doug Brodie, director of PEPmaster, an execution- only Pep service launched by London-based Master Adviser.
He is worried, however, about the way corporate bond-based PEPs are already being advertised - through interest-rate comparisons with building society savings rates. "People in our industry are potentially misleading the public," he says.
"Investors should realise that with corporate bond PEPs they are dealing in yields. These can't be compared directly with bank or building society interest rates," he says.
Rachel Medill of M&G also stresses the importance of ensuring that investors are aware of the risks. "Corporate bond PEPs can have a strong competitive advantage relative to building societies, but obviously the capital isn't guaranteed. The industry has a responsibility to make sure that people understand," she says.
M&G remains concerned, too, that tight eligibility rules on the corporate bonds permitted within PEPs could leave too many investors chasing too few products, potentially distorting the market. "We are optimistic, but only if the range of investment vehicles is large enough," Ms Medill says. "We are waiting to see what the guidelines are."
The Inland Revenue, however, has yet to announce its detailed proposals on corporate bond PEPs. Despite growing cries of protest from the industry, the Revenue says it has never committed itself to a 6 April start for the new scheme.
This has not stopped some companies from already offering corporate bond funds to be launched as soon as Revenue rules allow. However, the 6 April starting date looks increasingly unlikely. Until the Revenue does declare its hand, the attractiveness - or otherwise - of corporate bond PEPs will be hard to assess.Reuse content