Sling some savings into a single share

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The Independent Online
Many people are still confused by two of the less well-understood types of personal equity plan - single-company PEPs and self-select PEPs. But it's crucial to understand those differences (and they're not so complicated really) if you are to maximise your tax-free investment before 5 April, when the curtain falls on the generous PEP window of opportunity.

The single-company PEP tax wrapper (which disappears after 5 April) is exactly what its name implies: each year you can hold up to pounds 3,000 of shares in one company within a PEP, where they will be sheltered from income and capital gains tax. But the key factor to grasp is that this pounds 3,000 is an additional tax-free allowance, over and above the pounds 6,000 you can put into a general PEP.

Investing in a single company means that if your holding under-performs or goes bust, your entire investment suffers. In comparison, a pooled investment spreads the risk across a portfolio of many companies.

So single -company PEPs are not for the risk-averse or newcomers to stock market investment. They are useful, however, for those who have used up their pounds 6,000 general Pep allowance and still have cash to invest tax-efficiently.

If you want to invest in a blue- chip share, some of the major FT-SE 100 companies offer the chance to buy a PEP in their own shares. This is a very cheap service. Alternatively, you can choose a more unusual share and hold it in a PEP run by a stockbroker.

A low-risk alternative to the ordinary single-company PEP is a capital- protected plan. These guarantee the return of your capital, plus a certain level of growth or income, provided the index reaches a certain target. Be aware that while your risk is limited by the guarantee, your returns are capped. The stock market may do well over that time, but you won't benefit from any outstanding performance.

Self-select PEPs are the DIY option for your pounds 6,000 general PEP allowance, favoured by serious amateur investors who want to build and run their own tax-free portfolio of shares, unit and investment trusts.

Justin Modray of advisers Chase de Vere says: "You have complete control of your investment and simply trade through the PEP manager. But the downside is that they tend to be more expensive than ordinary unit trust PEPs." (Unit and investment trust PEPs usually offer the PEP wrapper free.)

There are also dealing costs: if you hold unit trusts in your self-select PEP, these could be the full 5 per cent or more.

For that reason, says Mr Modray, "most people with self-select PEPs hold individual shares in them - it's rare to see unit trusts in there. "

Individual savings accounts (ISAs) are introduced on 6 April. DIY investors will have a greater choice of eligible assets to put in an ISA - not only company shares and unit and investment trusts, but also other investments including gilts and loan stocks.

But the allowance is smaller. By buying a Maxi ISA, you will be able to put your whole allocation (pounds 7,000 in the first year, pounds 5,000 thereafter) into stocks and shares. If you want to use your ISA to shelter cash or insurance as well, you will only be eligible for a Mini stocks and shares ISA, capped at pounds 3,000.

n DIY PEPs: Charles Schwab, 0121-200 4535; Killik & Co, 0171-461 4400; Pilling & Co, 0161-832 6581.