Personal finance: The stampede to invest in PEPs puts us at a disadvantage to the providers

Click to follow
The Independent Online
AT LAST, the frenzy is over. Sales of PEPs finally stopped at midnight on Monday - but not before thousands of people spent a large slice of their bank holiday queuing outside PEP providers' offices, or even drove hundreds of miles to deliver their applications by hand.

This last-minute investment ritual is complete madness. Of course, there will be people who cannot invest until they know how much money they have available in that tax year. But for the vast majority, investing in this way is simply a reflection of the fact that they failed to do anything about their savings in the 12 months prior to the abolition of PEPs.

The danger of this approach is two-fold. The most obvious is that the stampede to invest in this way puts us at a disadvantage to PEP providers themselves.

Sure, some of them will tempt savers by offering discounts on their products that might not be available at other times of the year. Generally, however, it is possible to obtain discounts throughout a tax year.

At the same time, it becomes virtually impossible to do one's homework on a particular fund, checking out its performance, its volatility, the investment approach of one fund manager relative to another. Remember: if you are tucking away several thousands of pounds for several years, these are just a handful of the questions that need to be asked.

Even more dangerous is the fact that this wall of money flooding into equities at the same time has the effect of pushing share prices up beyond what many experts consider to be their normal value. In other words, investors end up paying inflated prices for their PEPs, which is precisely the opposite of what any canny saver ought to be doing.

We will only discover how inflated these prices were in a few weeks' time. Hopefully, not too much, or else - even bearing in mind that equity investment is something you do for the long haul - nursing an immediate loss on one's fund will be the result for many savers.

One further thought strikes me. The last-minute investment push also had the effect of pushing many savers, whose tax position meant that PEPs gave them virtually no gain whatsoever, into buying one. Of course, newspapers (possibly including this one) may have contributed to the sense of panic - although most responsible journalists did point out that in many cases there was little need for this last-minute frenzy.

But a large part of the blame must lie with PEP providers themselves. They knew that PEPs would be replicated by ISAs which are virtually identical in terms of their tax-effectiveness. Simply telling investors: "Don't worry if you miss the PEP bus, there'll be an ISA one along in a minute" wouldn't have generated a fraction of the sales they achieved in the countdown to 5 April.

In recent months, providers have complained bitterly about CATmarks, the Treasury's attempt to ensure fairly-priced financial products. Fund managers say benchmarks expose unwary investors to greater risk, because they assume any CATmarked product carries a Government seal of approval.

I must remember that claim the next time I read interviews with those queueing on Easter Monday, who admitted they didn't have a clue about PEPs, but felt they simply had to invest because, well, they didn't want to miss the boat, did they?