Special Report on Peps and Tax Planning: Individual or collective bargaining?: Alison Eadie reports on the increase of managed trusts

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WHEN PEPs were first introduced they were intended to create a share-owning democracy and only allowed direct investment in equities.

Over the years the amount that can be put into a collective vehicle has risen. With pounds 6,000 now available for investment in unit or investment trusts or a managed vehicle, some of the enthusiasm for investing directly has waned.

The reason is that investing in a collective vehicle gives a better spread of risk than splitting pounds 6,000 between two or three shares. Several fund managers, who used to offer direct share buying, now only sell unit or investment trust PEPs, as it is administratively cheaper and less time consuming.

Although investors can put pounds 6,000 in a collective PEP and top it up with pounds 3,000 in a single company PEP, financial advisers caution against single company PEPs unless the investor has a reasonably diversified portfolio. A self-select share PEP or single company PEP is usually only recommended for individuals with share portfolios worth at least pounds 50,000.

For smaller investors intent on a single company PEP, a blue chip high-yielding stock is seen as the safest option. A halfway house between a direct share PEP and a unit or investment trust PEP is a managed vehicle where the fund manager makes the selection of shares from a small pool. Save and Prosper's Managed Portfolio invests in 14 blue chip shares. Invesco MIM's Tax Haven managed share PEPs recently increased the number of shares in the portfolio to 20 as a way of diversifying the spread and reducing the risk.

Self-select share PEPs are available mainly from stockbrokers whose private clients are best suited to such investments. Charging structures vary, but should be scrutinised carefully as high initial charges and percentage management charges on an increasing portfolio can offset the tax savings.

The stockbroker Henderson Crosthwaite charges a flat fee of pounds 50 for setting up a self-select PEP, an annual management fee of 1 per cent and dealing commission of 1.25 per cent. From 6 April the management fee will come down to 0.75 per cent and dealing commission to 1 per cent subject to a minimum pounds 25.

Pilling and Co, the independent stockbroker, does not charge a setting up annual management fee. It makes a pounds 6.75 charge for the reclamation of the tax element of each dividend from the Inland Revenue. It therefore advises clients to choose shares which pay out no more than twice a year and not to split the pounds 6,000 PEP allowance between more than three shares. It charges 1.65 per cent dealing commission subject to a minimum pounds 30.

PEPs have proved useful to large investors wanting to shield chunks of their existing portfolio from tax each year. Investors can sell and buy back shares to put in a PEP, being careful to keep below their capital gains tax threshold. 'Bed and Pepping' can be done in a day, as long as the money is sitting waiting in the PEP. The Inland Revenue stipulates that the PEP must be created first.

The alternative option would be to sell the shares, transfer the money on account day to the PEP and then buy back. There is no obligation to buy back the same share if market fluctuations in the interim has made it less attractive.

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