Special Report on Peps and Tax Planning: Time to trust in the future: Christine Stopp believes low costs and spread of risk have contributed to the growth in popularity of unit trusts

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NOW THAT pounds 6,000 can be invested in collective funds within a PEP, unit trusts are coming into their own as PEP vehicles. Their convenient 'packaging', relatively low costs and spread of risk make them far more suitable than a share PEP for most investors.

Since the start of PEPs in 1987, a married couple putting the maximum into unit trust PEPs would by now have a fund of almost pounds 13,000, without any allowance for growth. Few investors will be able to use up the full pounds 6,000 allowance now available every year.

Not every unit trust can be used to invest the whole pounds 6,000 PEP allowance. 'Qualifying' trusts are those which have at least 50 per cent of the fund in EC stocks. Most are UK funds, with only a very small element invested elsewhere. A non-qualifying trust is not subject to the 50 per cent rule. You can only put up to pounds 1,500 of your pounds 6,000 into these.

Performance has always been a problem with PEPs. A unit trust PEP is easier to monitor than more complicated plans, though if it is invested in a number of funds and switches have been made, the investor will need to keep track very carefully. Unit trust performance figures, such as those found in the press, can be used, but are usually calculated with net income reinvested, thereby understating PEP performance.

The following points are reminders for those choosing a PEP:

Never choose a unit trust PEP which has a layer of plan charges on top of the actual fund charges. There are plenty of unit trust plans with only one charging layer.

Most investors should choose a portfolio with an element of income. This reduces the capital risk and increases consistency of returns. Remember that a high yield will lead to lower capital growth.

Check the dividend options. Can you reinvest income now and decide later to have it paid out? Increasingly, PEPs will pay income monthly.

A unit trust PEP is usually restricted to the plan manager's own funds. Not all the group's unit trust may be available through the PEP. Some may offer a single fund or one income and one growth fund. Others allow any of their trusts to be held in the PEP, which makes an international spread of investment possible.

Fidelity, Mercury and Henderson all offer 'phased investment', where your lump sum is held on deposit and fed into the unit trust in monthly instalments - an attractive method for the nervous investor.

You could choose your own range of unit trusts through a stockbroker 'self-select' PEP, though the charges would probably be high. Unit trust brokers will advise on suitable PEPs for your circumstances.

Despite the very low charges and good performance of some investment trust PEPs, unit trusts may be preferable to the regular saver. This is because an investment trust can go to a premium, which means that some monthly contributions will be buying assets for more than they are worth.

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