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
Travel
travel
News
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014
peopleTim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
News
Jamie and Emily Pharro discovering their friend's prank
video
Arts and Entertainment
Taylor Swift crawls through the legs of twerking dancers in her 'Shake It Off' music video
musicEarl Sweatshirt thinks so
PROMOTED VIDEO
News
Our resilience to stress is to a large extent determined by our genes
science
Travel
travel
Sport
sportBesiktas 0 Arsenal 0: Champions League qualifying first-leg match ends in stalemate in Istanbul
News
Pornography is more accessible - and harder to avoid - than ever
news... but they still admit watching it
Arts and Entertainment
The eyes have it: Kate Bush
musicKate Bush asks fans not to take photos at London gigs
News
i100
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Sport
Manchester United are believed to have made a £15m bid for Marcos Rojo
sportWinger Nani returns to Lisbon for a season-long loan as part of deal
News
news
News
i100
Arts and Entertainment
O'Toole as Cornelius Gallus in ‘Katherine of Alexandria’
filmSadly though, the Lawrence of Arabia star is not around to lend his own critique
Life and Style
fashion
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

Quantitative Developer

£700 per day: Harrington Starr: Quantitative Developer C++, Python, STL, R, PD...

Web developer (C#, MVC4, HTML5, CSS3, Javascript, Jquery)

£30000 - £44000 per annum + Bonus+Benefits+Package: Harrington Starr: Web deve...

Senior Automation QA Engineer (Java, Selenium WebDriver, Agile)

£40000 - £65000 per annum + benefits+bonus+package: Harrington Starr: Senior A...

Web developer (C#.NET, ASP.NET, MVC3/4, HTML5, CSS3, JAVASCRIPT

£35000 - £45000 per annum + benefits+bonus+package: Harrington Starr: Web deve...

Day In a Page

Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

Lewis Fry Richardson's weather forecasts changed the world...

But could his predictions of war do the same?
Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

'I want to have contact with the audience, not iPhones'

Kate Bush asks fans not to take photos at her London gigs
Under-35s have rated gardening in their top five favourite leisure activities, but why?

Young at hort

Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

Beyond a joke

Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

Sadly though, the Lawrence of Arabia star is not around to lend his own critique
Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

A wild night out

Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

Comic Sans for Cancer exhibition

It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

Besiktas vs Arsenal

Five things we learnt from the Champions League first-leg tie
Rory McIlroy a smash hit on the US talk show circuit

Rory McIlroy a smash hit on the US talk show circuit

As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
Boy racer Max Verstappen stays relaxed over step up to Formula One

Boy racer Max Verstappen stays relaxed over step up to F1

The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
Fear brings the enemies of Isis together at last

Fear brings the enemies of Isis together at last

But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment