Personal Finance: Don't rush into a PEP

MONEY Q&A
I still see many advertisements for PEPs. I have a bit of spare cash to invest. Is it worth starting a PEP in view of the fact they will be replaced in April by the new ISA - individual savings account?

WS, LONDON

The answer is a qualified yes. The attraction of PEPs remains the same now as it always was. First, you have to decide whether the underlying investment is one you would consider even outside the tax-free PEP wrapper. Don't be tempted by a PEP because it has a tax-free tag. PEPs invest in shares and corporate bonds, which are all risk investments to varying degrees - the risk being that the value of your capital could fall as well as rise.

The second question is whether there are any extra charges in a PEP on top of the investment management charges? If so, would the tax you save be more than the charges? The tax saving on share dividends is being halved from 6 April, from 20 per cent of the gross dividend to 10 per cent. This will make it harder for many basic-rate taxpayers to justify PEP charges, especially if they are also unlikely to incur a bill for capital gains tax on investments held outside a PEP. Higher-rate taxpayers and investors with large portfolios who may well face a CGT bill are more likely to save money once they have deducted PEP charges from PEP tax savings.

That said, many investment management companies offer the PEP tax wrapper without additional charges, so that the tax-free status of PEPs offers a saving.

The fact that no more new money will be put into PEPs after 5 April 1999 makes the next few months a genuine time to "buy now while stocks last". All money invested in PEPs by 5 April will remain there indefinitely. A proposal to cap existing PEPs at pounds 50,000 has been dropped. Any money held in PEPs on 5 April will not affect your right to invest in the ISAs (with their own annual investment limits) available from 6 April.

You can invest up to pounds 6,000 in a general PEP and up to pounds 3,000 in a single- company PEP in the current tax year, presenting a one-off opportunity to invest pounds 9,000 in a tax shelter (on top of any PEP investments you have made in previous tax years). But if your funds available for investment are fairly modest, you may find the ISA limits adequate (up to pounds 7,000 in the 1999-2000 tax year, pounds 5,000 in subsequent years). So don't make a rushed decision.

Similarly, you will no longer be able to open a Tessa after 5 April. But accounts opened by that date will be allowed to run their course, with the chance to invest up to pounds 9,000 tax-free over five years. This pounds 9,000 is also on top of any ISA investment, so again you have a one-off opportunity to put up to pounds 9,000 in a tax-free account.

Write to the personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number; or fax 0171-293 2096; or e-mail i.berwick@independent.co.uk

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