Special Report on Personal Equity Plans: Answers to some of the tricky questions: What happens to your PEP when you die? Do managers charge a surrender fee? Christine Stopp fills in the gaps

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The Independent Online
FOUND a wrinkle in your PEP? Here are 10 questions and their answers which you are unlikely to find in your plan brochure:

Q: What happens to your PEP on your death? A: The 'personal' in Personal Equity Plan means the tax benefits attach only to you, ceasing on your death, so a dividend due for payment the following day would be taxable. Your heirs will receive the investments or the cash value of the plan.

Q: Can you invest in a PEP for a child? A: No. A PEP investor has to be 18 years old. You can leave the assets in your own PEP to a child in your will (see above).

Q: Does the pounds 6,000 limit include PEP charges? A: Only where unit trusts are concerned, since their charges are built into the unit price. On shares (including investment trust shares) the charges are separate from the investment and may be paid on top.

Q: Which companies offer 'phased investment' PEPs? A: Fidelity, Mercury and Henderson. You give the management company a lump sum which is put on deposit and transferred a bit at a time into stock market investments within the PEP. The idea was to reduce the risk of investing a lump sum when markets were volatile.

Q: Can you hold an unlisted company in a PEP? A: No. PEP shares have to be quoted on the stock exchange. However, you can hold in a PEP an investment trust which has some unlisted holdings.

Q: Which companies offer ethical/green PEPs? A: The following unit trust groups are the main ones offering environmental or ethical trusts (name of trust shown in brackets): Abtrust (Ethical), Bradford & Bingley (choice of Eagle Star or Scottish Equitable trusts), CIS (Environmental), CSAM/Buckmaster (Fellowship), Eagle Star (Environmental Opportunities), Friends Provident (Stewardship Income), NM (Conscience), NPI (Global Care), Scottish Equitable (Ethical), Sovereign (Ethical), TSB (Environmental). You could also put together a DIY portfolio using a self-select PEP.

Q: What happens to your share or investment trust PEP if the company is taken over? A: A PEP investor holding shares has the same rights as any other shareholder and in a bid can decide whether or not to sell. The PEP will not be invalidated if the shares it holds are taken over - cash will be paid into the plan on shares sold and can be held until another investment opportunity presents itself. If an investment trust is taken over, the same applies. What if the investment is in a single trust PEP run by the trust's own management company? If the trust were taken over and liquidated (leaving the management company out of a job) the PEP manager would continue to act for the investor, receiving cash from the shares and transferring it to another manager, or perhaps to another investment trust run by the same management group. Large, well-run general trusts are less likely to be taken over than small, specialist trusts. Investment trusts specially set up as PEPs are least likely to be taken over as they have the highest concentration of private shareholders. It is the weight of institutional investors which tends to contribute most strongly to trusts being taken over.

Q: Does the ' pounds 6,000 in unit trusts' rule apply retrospectively? A: Before the 1992/93 PEP year you could only put pounds 3,000 out of the total PEP limit of pounds 6,000 into unit trusts or investment trusts. Since the last Budget, you can put the full pounds 6,000 into funds. Can you switch pre-1992 PEP holdings into funds to use up the full pounds 6,000? The answer is yes. Some companies offering managed PEPs made the move without consulting investors. As a result of the change there are now far fewer mixed PEPs (combining shares and funds) on offer.

Q: Do PEP managers charge surrender fees? A: There is no huge penalty for early withdrawal as there is on an insurance plan. Some managers charge a flat fee of up to pounds 25 for a partial withdrawal. A few charge a small percentage for encashment within the first two or three years. These are mostly managers whose initial charge is also low.

Q: What happens if your PEP manager goes bust? A: It is very unlikely that your PEP holding would be endangered if the manager went bust, as the shares or units are held in your name, in the keeping of a nominee company. All the organisations concerned are authorised and monitored by one or more of the self-regulatory organisations. Many are very substantial companies. If you are nervous, choose a plan manager which is a large household name institution - provided its investment performance is good.

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