Personal finance: Money Q&A

I am a mature student aged 27 and I will graduate in the summer. I hope to get a decent job. Back in 1990 I contracted out of Serps and took out a personal pension. Three years later I was made redundant and have not had a regular job since then. I have made no further pension contributions. Have I lost out and is there anything I should do now?

SA, ESSEX

You have lost out if you have not made personal pension contributions or paid Class I National Insurance to build up an earnings-related Serps pension.The question is whether you have lost more than was strictly necessary. Many personal pension plans have a charging structure that rips you off if you fail to make regular contributions. A great number of people stop making regular pension contributions within a few years of taking out a plan because of unforeseen events in their lives such as redundancy. Their pension plans become virtually worthless. In view of the high risk of failure to last the course, it makes sense for most people to consider only "single premium" plans rather than regular premium plans.

You should contact the pension plan provider to see how things stand and whether (if you have the money) there is anything you can do to retain the value of the plan.

But be prepared for a shock and be careful about throwing good money after bad either now or when you start work later this year.

Most experts agree an employer's pension scheme is a better option than a personal plan, even for employees who stay with an employer for a short time. Did you have the option to join a company scheme back in 1990? If so, was the choice to start a personal pension yours alone or did you receive advice from an independent financial adviser or company salesman? If you were advised to start a personal pension when you could have joined an employer's scheme, then you may be due compensation. For details, ring the investors' help line at the Financial Services Authority on 0845 6061234.

On a separate matter, you may want to make voluntary Class III National Insurance contributions once you graduate to ensure you qualify for the maximum state pension benefits.

Single PEPs

Although I am aware of the pounds 3,000 single company PEP allowance, I don't see PEP advertisements referring to this element of PEPs. Can you please give me some information?

PC, MERSEYSIDE

Most PEP advertisements tend to concentrate on general PEPs. These have a pounds 6,000 annual investment limit and tend to promote pooled funds.

Pooled funds have many areas of specialism, for example large UK companies, small north American companies, Japanese companies or corporate bonds. You spread your risk because the fund buys shares in a range of companies. The PEP is simply a tax-free wrapper for your chosen fund.

The single company PEP is a different animal. You can invest up to pounds 3,000 each tax year in a single company PEP and this is the last tax year in which new money can be subscribed.

In a single-company PEP, all your money must be invested in the shares of just one company. There is no risk-spreading. You risk losing a lot of money if the shares in your chosen company do badly. The single company PEP was designed to provide a tax shelter for employees who acquired shares in their employer through a scheme at work.

Yet conventional investment wisdom says investors with few assets should not bear the risk of direct share-holdings, even if those shares were free or bought at a discount. Strict investment logic dictates many people should sell their building society conversion shares and reinvest the money in a pooled fund. Some people may even prefer to put the money in a deposit account. Single company PEPs are more appropriate for investors who have a balanced portfolio of shares and other investments.

You should also be aware that, unlike many general PEPs based on pooled funds, there are usually extra charges for holding your shares in a single company PEP.

Some do have relatively low charges, but it is hard to see how even many low-charging PEPs can be cost effective for basic-rate tax-payers. The value of the income tax credit in PEPs is being halved in April, so the income tax saved may well be less than the charges levied by the plan manager.

PEPs do shelter your investments from capital gains tax as well as income tax, but many small investors are unlikely to have to pay capital gains even on shares and other investments outside a PEP.

Many banks, building societies and stockbrokers offer single company PEPs. Some run low-cost PEPs for specific companies.

When you decide to sell the shares, you may have to go through the rigmarole of formally transferring the PEP to a different plan manager in order to reinvest through a PEP in a different company.

Bank of Scotland, Bradford & Bingley, Halifax, Henderson and Royal Bank of Scotland are among the plan managers offering a range of single company PEPs.

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

Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies, nor can we guarantee to answer letters. We accept no legal responsibility for advice given.

Plug the pension leak

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