So you think you want a PEP?

PERSONAL EQUITY PLANS How do these investments work? Are they safe?

Q: A PEP is a Personal Equity Plan, right? It is a kind of unit trust containing a number of different shares, but I get the dividends paid tax-free and any profit I make does not count as capital gains tax, right?

A: Right.

Q: And I can take the money out of the PEP again at any time, without having to pay back tax?

A: Right again. With a tax-exempt Tessa deposit account you lose the tax advantage if you take your money away in less than five years. With a PEP there is no such limitation. PEP providers recommend holding the PEP for at least three years, preferably five, to give yourself a reasonable chance of coming out with a gain rather than a loss.

Q: Sounds too good to be true. So what's the catch?

A: Well for one thing, shares are shares. The dividends are not guaranteed, they are usually less than the same investment would earn on a deposit in a bank or building society, and although share prices go up more often than down in the long run, you could just find yourself needing to sell in a short run. And you may not invest more than pounds 6,000 a year in a general PEP, plus a further pounds 6,000 for your partner.

Q: So who chooses the investments to put in the PEP?

A: The PEP manager - usually a bank, a unit trust group, or a stockbroker - chooses qualifying shares, units or investment trusts to put in a managed PEP and does the administration for you in return for ...

Q: I know, in return for a fee, a charge, which will wipe out all the benefits from the tax concessions, I suppose?

A: Well, yes, and no. Some managers waive their initial fees to get you in, and charge you a withdrawal fee instead if you decide to take your money away in less than, say, five years. But all managers will charge an annual management fee, which will cost you, regardless of whether, or how much, the value of your PEP goes up or down.

Q: Can I choose the shares myself to put in my PEP rather than pay the charges?

A: Yes, you can have a self-select PEP, from Fidelity and other managers, where you choose the shares yourself, and it will cost you less. But there will still be a charge of some sort.

Q: Are there any specialist PEPs or are they all general?

A: Well, PEPs invested in unit trusts and investment trusts may be specialised, but most are linked to general UK or, perhaps, high income trusts. Gartmore Shaw operates a PEP that invests only in utilities, and it has been making great play of its performance, thanks to the possible bids for water and electricity companies. Richard Branson's Virgin Direct will sell you a "tracker" PEP that selects the shares to buy and sell by computer in order to track or follow the FT All-Share index.

Q: Can I have a PEP containing unit trust units or investment trust shares, rather than shares in individual companies?

A: Yes. Originally there were restrictions on the amount of unit trusts and investment trusts you could hold in a PEP, but they have been steadily relaxed. The rules now allow investors to have shares, unit trusts, investment trusts, or a mixture of all three, in a PEP. But you still have to buy your units at one price and sell them at a different price. The difference can be as much as 5 per cent and will run away with a slice of your capital.

Q: Can I have a PEP containing shares in just a single company?

A: You can invest up to pounds 3,000 a year in a single company PEP, in addition to the pounds 6,000 you put in your general or self-select PEP. But you cannot put the pounds 3,000 single company PEP into an investment trust.

Q: Is there a right time and a wrong time to buy a PEP?

A: You can only invest up to the annual limit, and there is nothing to be gained from buying when the stock market looks like falling from a cyclical peak. But many advisers do recommend that their clients make sure they have their annual entitlements before the middle of March, to qualify for the end of the tax year.

Q: You talk about lump sums. If I don't have pounds 6,000 to invest, can I contribute to a regular savings plan?

A: Yes. Many PEP providers will allow you to invest lump sums as small as pounds 500 to pounds 1,000 a year, or regular savings contributions as small as pounds 30 to 50 a month. The charges for buying unit trusts via a savings plan are the same as for a lump sum investment, but it is a less painful way to accumulate.

Q: Do I have to take the dividends and how will they be paid?

A: Usually they are paid quarterly or half-yearly tax free by the PEP provider, whose job it is to reclaim the tax on your behalf, but you can roll-up and reinvest the dividends for maximum appreciation.

Q: So who should buy a PEP?

A: Investors who already invest in shares and unit or investment trusts, and are not likely to panic if they see the value of their investments falling, and dump them at a loss. It was also expected to appeal mainly to higher-rate taxpayers, who would get most benefit from having tax- free dividends. In fact, more standard-rate taxpayers have invested than higher-rate taxpayers. They use them as tax-efficient savings plans, as pension supplements and as ways of paying off their mortgages.

Q: Last , but not least, is there any political risk?

A: Honestly, we don't think so. The post-war Labour Party soaked the rich with extra taxes on investment income. The Labour Chancellor, Sir Stafford Cripps, was a byword for austerity at that time. The investment income surcharge lasted into the 1980s.

It took Margaret Thatcher's Conservative government and its Chancellor, Nigel Lawson, then Chancellor, to tip the balance the other way. But the change is now entrenched. New Labour, under Tony Blair, shows no inclination to turn the clock back.

Suggested Topics
PROMOTED VIDEO
Life and Style
fashionHealth concerns and 'pornified' perceptions have made women more conscious at the beach
Arts and Entertainment
tv
Sport
Ojo Onaolapo celebrates winning the bronze medal
commonwealth games
Arts and Entertainment
Rock band Led Zeppelin in the early 1970s
musicLed Zeppelin to release alternative Stairway To Heaven after 43 years
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmHe was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
Sport
Van Gaal said that his challenge in taking over Bobby Robson's Barcelona team in 1993 has been easier than the task of resurrecting the current United side
footballA colourful discussion on tactics, the merits of the English footballer and rebuilding Manchester United
Life and Style
Sainsbury's could roll the lorries out across its whole fleet if they are successful
tech
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Travel
The shipping news: a typical Snoozebox construction
travelSpending the night in a shipping container doesn't sound appealing, but mobile crash pads are popping up at the summer's biggest events
Arts and Entertainment
'Old Fashioned' will be a different kind of love story to '50 Shades'
film
Arts and Entertainment
Tracey Emin's 'My Bed' is returning to the Tate more than 15 years after it first caused shockwaves at the gallery
artTracey Emin's bed returns to the Tate after record sale
Arts and Entertainment
Smart mover: Peter Bazalgette
filmHow live cinema screenings can boost arts audiences
Environment
Neil Young performing at Hyde Park, London, earlier this month
environment
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

HR Business Partner - Banking Finance - Brentwood - £45K

£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

PA / Team Secretary - Wimbledon

£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz