Personal Equity Plans: Big rush for bond PEPs

THIS is the year of the bond PEP. You may have seen adverts for a rash of new PEPs designed to cash in on this craze. M&G has attracted more than pounds 100m into its high-yield bond fund and similar funds from Fidelity, Schroders and Framlington have launched this month. Perpetual launches its high-yield fund next week and plans an estimated gross return of 8.5 per cent a year.

There is a good reason for all this excitement. Corporate bonds are issued by large companies to raise money and they pay a good level of income, tax-free. Bond investors will beat future interest rate cuts and effectively lock themselves into a good rate of return, even if they do not take an income. Interest on the bonds can be left to roll up in the fund.

The other big advantage of bonds over shares is an upcoming tax change. Neil Niven, marketing manager at HSBC-Midland says: "If you have a share with a dividend of pounds 1 you will only get 80p of that but it has a 20p tax credit, so in a PEP you get that 20p back. When we get to ISAs that 20p credit will be reduced to 10p. In a corporate bond fund you will still get the 20p tax credit repaid." This 10p rebate will be reduced to zero in 2004, making bonds even more attractive for the long term.

Most of the established bond PEP funds are aimed at older, conservative investors. They are made up of top-rated bonds from blue chip companies and government bonds (gilts). Two of the most popular are the CGU Monthly Income PEP, currently offering 6.67 per cent and Barclays' Global Investors Fund paying 6.10 per cent.

The new high-yield funds buy bonds from companies with a lower credit rating. M&G's established fund is paying 7.79 per cent at the moment and Framlington is aiming at 8 per cent. These funds are higher-risk but do not deserve a "junk bond" label: M&G says that even if the worst were to happen and a company went bust, its bondholders would typically get back 50 per cent of their investment. Ordinary shareholders would get nothing.

If you buy a bond PEP through an IFA or direct from the manager, you will pay initial charges including commission. Discount PEP brokers are much cheaper (see page 17).

Contacts: Barclays, 0181-522 4000; CGU, 0845 607 2439; Fidelity, 0800 414171; Framlington, 0345 775511; M&G, 0800 390390; Schroder, 0800 002000.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
film
Arts and Entertainment
Preening: Johnny Depp in 'Mortdecai'
filmMortdecai becomes actor's fifth consecutive box office bomb
News
peopleWarning - contains a lot of swearing
Travel
travel
Arts and Entertainment
arts + ents
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

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project