Personal Equity Plans: A roof over your head

PROTECTED PEPs aim to offer investors the benefits of investing in the stock market when it is rising, without the danger of losing everything in a market crash.

Sounds too good to be true? You are right. This protection comes at a price, and you cannot get rid of all the risks built in to buying shares. However, if you are cautious about the stock market but realise you need a better return than the building society can offer, a protected PEP may be for you.

There are two sorts of protected PEPs: unit trust funds you can buy into at any time in the same way as a general PEP; and "packaged" protected PEPs with a fixed term, usually five or six years.

A general protected PEP will limit the amount of money you can lose every quarter or every year. The fund managers do this by buying options contracts to hedge their risk against stock market movement. Some of these protected PEPs have a normal equity fund, usually an index tracker (see page 19 for more on tracker PEPs) as the main part of the investment. The managers then take out "put options". These are derivatives contracts which give the managers the right to sell the value of the index being tracked (the FT-SE 100) at a fixed price. The contracts usually last for three months, which is why some of these PEPs quote a quarterly "floor" below which your investment cannot sink. The Govett UK Equity Safeguard fund, for example, cannot fall by more than 2 per cent a quarter.

Other funds have annual "floors" - the market leader in this area is the Scottish Widows Safety Plus PEP. It guarantees that your investment can only fall by 5 per cent a year.

The downside to these funds is that you will not get the benefit of a full rise in the stock market. The managers cream off some of the returns in order to make money on the fund and pay for the options contracts.

The second type of protected fund is a "packaged" PEP with a short subscription period and fixed investment term. As we come up to the April PEP deadline there are likely to be several packages launched. There are four on offer at the moment from HSBC, Midland Bank branches, GE Assurance and Scottish Widows (see box).

You have to commit your money for the length of the contract or risk losing it. The managers use the investors' cash to buy a derivative package to mirror the returns on a particular index (almost always the FT-SE 100) over the fixed period. If the index goes up over the period, investors get their money back, plus growth up to a stated limit.

"There are no charges for the money you pay in," says Victoria Lee at HSBC. "The charges are wrapped up in what you get back."

The limit on the upside of these funds is that the investor is no better off whether the FT-SE 100 rises by 1 per cent or 100 per cent over five years. Despite this, these packaged funds have taken in billions of pounds. These PEPs qualify for a pounds 9,000 PEP allowance, taking in the pounds 6,000 general allowance, plus the pounds 3,000 single company limit. If you are interested in buying a protected fund, but are not convinced you will be able to leave the money untouched for five or six years, then the permanent types of protected PEP may be a better bet.

Ian Milward at IFA Chase de Vere says: "We use the packaged PEPs more for investors who want a low-risk fund as an alternative to a deposit account. The other type of fund is more dependent on the fund manager's ability, and they run the risk of disappointing investors if they get things wrong."

Contacts: Govett, 0845 300 9090; Scottish Widows, 0345 678910.

protection

Current protected PEP offers

GE Financial Fund Management, 0181-380 3000.

GE Financial is an unfamiliar name but it is owned by the US utilities giant, General Electric. Its GE Capital Premier Fund pays 7.5 per cent a year for five years or the income can be left to grow with a guaranteed return of 42 per cent after five years.

Investors get all their original capital back at the end of the term if the FT-SE 100 remains the same level or has risen. Any fall means that percentage of original capital is lost - a 10 per cent fall means a 10 per cent loss of capital.

The HSBC Capital Protected Income PEP, 0800 289 505.

Aims to pay 7.25 per cent income per year for five years but this may vary depending on interest rates and stock market movements. Investors who stay in for the full term get their original investment back, regardless of stock market performance.

Midland Capital Protected Growth PEP, 0800 299 299/or Midland-HSBC branches.

Six-year investment linked to growth in the FT-SE Eurotop 100, an index of the largest European companies. Return of capital guaranteed plus all growth in the index up to a maximum of 70 per cent.

The Scottish Widows Extra Income and Growth PEP fund, 0345 678910.

Offers an eye-catching fixed annual rate of return of 8 per cent for five years on a minimum investment of pounds 3,000.

The higher rate comes with some extra risk: original capital is only returned if the FT-SE 100 rises over the five years. If the closing index price is 5 per cent below the level it was at the start, investors will only get back 95 per cent of their capital.

Suggested Topics
Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
scotland decidesIs a huge gamble on oil keeping the First Minister up at night?
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Life and Style
techApple has just launched its latest mobile operating software – so what should you do first?
News
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
PROMOTED VIDEO
Arts and Entertainment
Lionel Messi in action for Barcelona
filmSo what makes the little man tick?
Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
News
i100
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Sport
Cesc Fabregas celebrates his first Chelsea goal
footballChelsea vs Schalke match report
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

News
i100
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

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Recruitment Consultant - Soho - IT, Pharma, Public Sector

£20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

Sales Executive

£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week