Personal Equity Plans: Pick 'n' mix for the select few

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The Independent Online
WITH more than 1,000 general managed PEPs to choose from, you would have thought that there was a wide enough choice for everyone. But some investors choose to go down the self-select route.

Instead of buying a PEP off the peg, where the PEP manager invests your money in one of its funds, these investors will buy a PEP shell and fill it with their own choice of investments, subject to the rules. While the vast majority of investors opt for managed PEPs, the self-select route may be more appropriate for the experienced investor who wants greater involvement in the construction and management of a PEP.

To set up a self-select PEP, you still need a manager to administer your plan and to deal with the Inland Revenue. As usual, you can invest up to pounds 6,000 a year in a general self-select PEP and pounds 3,000 a year in a single company PEP. You can only invest in one company's shares in a single- company PEP, but you can invest in a range of assets in a general PEP (see box).

Around 50 PEP managers, mainly stockbrokers, offer self-select PEPs. In most cases you will be able to set up and manage your PEP over the telephone.

Often it costs nothing to set up the PEP, but you usually have to pay an annual management fee and charges when you buy and sell investments in the PEP. Management and dealing charges vary. For example, some charge no annual fee but their dealing charges may be higher than if you went with a PEP manager that did charge an annual fee.

Most PEP managers, however, do charge an annual fee; in some cases this will be a percentage fee, typically 1 per cent. In other cases it will be a flat fee of say pounds 60. With a few, the annual fee will be based on the number of investments you hold in your PEP. Waters Lunniss Stockbrokers, for example, charges an annual fee of pounds 20 plus VAT for each holding in your PEP. If you only plan to hold one or two investments in your PEP this may be the cheapest option, but you can only hold shares and investment trust shares in its PEP.

If you want to buy shares or investment trust shares within your PEP, there will be dealing charges to pay. These also vary between PEP managers and are often subject to minimum levels. Barclays Stockbrokers, for example, has a dealing rate of 1.5 per cent and the minimum fee is pounds 15. Some PEP managers have a maximum dealing charge that can work out more economical if you are buying large parcels of shares. Charles Stanley, for example, has a maximum dealing charge of pounds 35, but its minimum dealing charge is pounds 20. So this PEP would work in your favour if you intended to buy in bulk. But if you were planning on buying small amounts of shares, perhaps through a regular savings scheme, it could work out expensive.

One of the cheapest deals around is Bradford & Bingley's low-cost self- select PEP. There is no initial charge, the annual fee is 0.5 per cent and the dealing charge is 0.25 per cent. But with this PEP you can only invest in FT-SE 100 shares. "As shares are only bought once a week, this will not suit the more active investor," says Sean Warters, of Bradford & Bingley PEPs. "We've set this up as a medium- to long-term investment. If you want to buy and sell quickly, changing the shares in your PEP on a frequent basis, this is not the PEP for you."

If you plan to trade regularly, a PEP with low dealing charges is likely to be most suitable. Whereas if you plan to set up the investments in the PEP and only change them occasionally, if at all, then a low annual fee may be more important.

If you want to invest in unit trusts, you first need to make sure your PEP manager offers this facility. Even where a PEP manager does allow this, it may only offer a limited range of funds such as its own unit trusts.

Usually your PEP manager will make no charge for buying your units as he will receive a commission fee from the unit trust provider. However, there will be an initial charge on the unit trust, typically 5 per cent, which you will have to pay. This charge covers the unit trust investment manager's costs including paying commission to introducing agents, such as your PEP manager.

"Some PEP managers are able to negotiate discounts on the initial charge which may then be passed on to you either in part or in their entirety," says Peter Hargreaves, managing director of Hargreaves Lansdown.

"We can often negotiate a discount on a unit trust which makes it cheaper to invest in the unit trust through us rather than going direct to the provider. Another major advantage of investing in a self-select PEP is that you can change your investments when you like and you do not have to do a PEP transfer."

q Contacts: Barclays Stockbrokers, 0345 777400; Bradford & Bingley, 01274 555700; Charles Stanley, 0171-739 8200; Waters Lunniss Stockbrokers, 01603 622265; Hargreaves Lansdown, 0800 850661 - ask for information on select PEPs.

Constructing a self-select PEP

You can invest up to pounds 6,000 a year in a self-select general PEP. Your pounds 6,000 can be invested in the following types of assets:

q shares - ordinary and preference shares listed on the UK or an EU stock exchange;

q unit trusts;*

q investment trusts;*

q Oeics (open-ended investment companies);*

q corporate bonds.

* These investments fall into two categories: "qualifying funds", where at least half the underlying assets are invested in the UK or the EU, and "non-qualifying funds". A non-qualifying fund may, for example, invest in the Far East. You can only invest up to 25 per cent of your PEP allowance in non-qualifying funds, up to a maximum of pounds 1,500.