PEPS: The Final Countdown: PEP transfer

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NO READER of this, or any other personal finance section, could have failed to notice that in a few days' time PEPs will no longer be available.

Strictly speaking, that's not true. You can still transfer your PEP from one provider to another. Indeed, Legal & General announced this week that it is planning to launch new PEPs after 6 April, so that investors can transfer into completely new funds.

Even so, investors seeking a first-time tax-free haven for their cash are best off looking at Individual Savings Accounts, or ISAs.

What are the ISA investment rules? You may invest up to pounds 7,000 in 1999/2000, and pounds 5,000 a year in subsequent years. This compares with a maximum of pounds 9,000 into regular and single-company PEPs, plus pounds 9,000 into a Tessa over five years.

The tax regime for ISAs will be exactly the same as that for PEPs and Tessas: exemption from capital gains tax and freedom from income tax, but with the diminishing benefit of dividend tax credits.

Permitted investments in an ISA will be far broader than under the old PEP/Tessa regime. PEP rules specify that up to pounds 1,500 of the annual pounds 6,000 allowance for a full PEP can go into "non-qualifying" funds. The rest must go into UK and European Union (EU) equities and bonds.

ISAs will have up to three components: equity, cash and insurance. Of these, the equity portion will be allowed to hold "any share traded on any recognised Stock Exchange anywhere in the world."

What this relaxation of the rules will allow is far wider choice of asset allocation. If you want to invest your whole annual allowance into, say, an emerging markets fund, you will be free to do so.

Fund managers plan to take advantage of this change in the rules. Investec Guinness Flight, for example, is preparing to offer 14 funds, including its Global High Income fund - previously not even available as a non-qualifying PEP fund - through an ISA account. This invests in mainly US and European government bonds.

In common with other major PEP providers, Investec will be offering its new accounts with the same initial and management charges as are attached to their PEPs. They will also be offering the ISA cash component alongside this.

Another important difference is that ISAs will be permitted to hold a far wider range of fixed interest securities such as UK and foreign corporate and government bonds. With the exception of UK gilts, all of these must have five years or more until maturity when bought into the ISA, but can be sold out of it at any time. Any gain on such a disposal will stay "inside" the account free of tax.

Over the shorter term, gilts, National Savings certificates and cash deposits with less than five years to maturity can be held in an ISA. National Savings itself is planning to enter the cash-linked ISA market (into which up to pounds 1,000 a year can be invested) by launching its own ISA paying 5.75 per cent. The Co-op, meanwhile, will be selling its ISA at cash tills.

Meanwhile only three insurance companies, Norwich Union, Pearl, and CIS, have definitely said they will be offering insurance ISAs. Norwich is marketing its own scheme as a mortgage repayment vehicle. The "insurance" element of this will be a with-profits savings plan, run in parallel with a "non-ISA" mortgage protection policy, combining life, accident sickness and unemployment cover. However, other insurers, including Standard Life, say they have no plans to follow suit.

One very distinctive feature of ISAs will be their use of CATmarks. The aim of these is to ensure a "fair and reasonable deal". Applied to the cash and insurance elements of ISAs, these will indicate low minimum premiums , few penalties, and surrender values reflecting the value of underlying assets in an account.

The Independent has produced a free last-minute Guide to PEPs. The 28- page guide discusses whether PEP investments might suit your needs, how to compare between them, what the tax benefits are - and aren't - and what their rules are. 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.