Special Report On Personal Equity Plans: Wrap up the advantages: Anthea Masey considers investment trusts as a way of buying a professionally managed spread

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The Independent Online
IF PEPS stood for Personal Equity Packaging rather than Plan, people would find the concept a great deal easier to understand.

This is the view of Fiona Monro of the Association of Investment Trust Companies (AITC), who says that a lot of people still do not understand that PEPs are just a mechanism for getting tax relief which can be wrapped round a number of different stock market investments, including investment trusts. 'We get letters from people asking for information about investment trusts and PEPs as if they were two entirely separate forms of investment and it is clear that they haven't understood what a PEP really is.'

Investing in the shares of an investment trust company is one of the cheapest ways of buying a professionally managed spread of stock market investments. Fiona Monro suggests that people should choose an investment trust first and then decide whether they can save money by putting the shares into a PEP.

During the 1992/93 tax year you can put up to pounds 6,000 ( pounds 12,000 for a married couple) into a general PEP. In the previous tax year only half that could be invested in investment trusts. This restriction was lifted in the last budget, which means that you can now put the entire general PEP allowance of pounds 6,000 ( pounds 12,000 for married couples) into investment trusts.

However, there are exceptions. To qualify for the full pounds 6,000 PEP allowance, an investment trust must keep at least half its investments within the EC. Investment trusts which do not qualify can still be included in a PEP but the investment is restricted to pounds 1,500.

The PEP qualifying rules prevent investors from putting their full PEP allowance into some of the best known investment trusts, such as Foreign & Colonial and Alliance. Both these have made a virtue of overseas investment, deciding to retain their freedom to play the world's stock markets.

The AITC continues to do battle with the Chancellor on behalf of such trusts. As Ms Monro points out, there is an inconsistency in the Treasury's thinking. 'There is nothing to stop people putting their full pounds 6,000 PEP allowance in companies which earn more than half their profits outside the EC. Why should people be prevented from putting their full PEP allowance in investment trusts which are in the same position?'

The Alliance PEP has been described as the Rolls Royce of the PEP world. According to Gavin Suggett, Alliance director, since launching its PEP in 1987, Alliance has attracted pounds 110m largely by word of mouth. 'We can keep costs to the absolute minimum because we don't advertise and we don't pay commission to financial intermediaries.'

The problem with many PEPs is that the charges, both for setting up the PEP and for running it, can outweigh the tax savings, especially for basic rate taxpayers who have no capital gains tax problem. With the Alliance PEP there is no initial charge for setting up the PEP and no annual charge. The only charge is commission of 0.15 per cent when the PEP is invested in Alliance or Alliance Second, and 0.25 per cent plus a pounds 5 purchase charge if the PEP is topped up with other shares.

Foreign & Colonial chose a different route out of the non-qualifying problem; it launched a new qualifying trust, Foreign & Colonial PEP which, like Foreign & Colonial, invests only in leading companies, the only difference being that it restricts its investments to Europe. According to Jeremy Tigue, a director, most investors put pounds 1,500 into Foreign & Colonial and the balance of pounds 4,500 into Foreign & Colonial PEP. The charges on the Foreign & Colonial PEP discourage the smaller investor. The initial charge is pounds 50 for lump sum investors with an annual charge of pounds 60 and monthly savers are charged pounds 5 a month. Both types of investors pay commission of 0.2 per cent.

The very best value for money investment trust PEP for regular monthly savers - better even than the Alliance scheme - is the one run by Ivory & Sime. You can invest between pounds 100 and pounds 500 a month into British Assets, I & S Optimum Income, Investors Capital or Continental Assets at absolutely no cost at all; there is no initial charge, no annual charge and no commission.

A list of investment trust PEPs is available from the AITC, Park House (6th Floor), 16 Finsbury Circus, London EC2M 7JJ, tel: 071-588 5347.

------------------------------------------------------------------------ CORPORATE PEPS: FT 30 SHARE INDEX COMPANIES CHARGES TO NEW INVESTORS ------------------------------------------------------------------------ Share Minimum investment Charges Commission Pep provider Yearly Monthly Initial Annual % (1) pounds pounds pounds % Allied Lyons 300 25 15 0.5(2) 0.25 B&B Asda 1,000 60 0.5% 0.75(3) 0.25 Henderson BP 300 n/a 15 0.5(2) 0.25 B&B BT 1,000 n/a 20 0.5 0.2 Halifax BICC 1,000 n/a None 0.5 0.2 Halifax Blue Circle 500 50 None 0.5 0.25 NatWest Boots 500 50 None 0.5 0.25 NatWest British Airways (4) 500 100 None 0.5(5) 0.25 Barclays British Airways (6) 1,500 100 None 0.5(5) 0.5(7) Barclays British Gas 500 50 None 0.5 0.25 NatWest BTR 1,500 n/a None 0.5(8) 0.5(9) Barclays Forte 500 50 None 0.5 0.25 B of S GEC 1,000 100 None 0.5(10) 0.5(9) Barclays Glaxo 300 25 15 0.5(2) 0.25 B&B GrandMet 300 25 15 0.5(2) 0.25 B&B Guinness 500 50 None 0.5 0.25 B of S Hanson 1,000 n/a 0.5% 0.5 0.25 Henderson ICI 500 50 15 0.5(2) 0.25 B&B Lucas 1,000 n/a None 0.5 0.2 Halifax P&O 300 25 15 0.5(2) 0.25 B&B Reuters 1,500 n/a None 0.5 1 B of S SmithKline Beecham 300 25 15 0.5(2) 0.25 B&B Tate & Lyle 300 25 15 0.5(2) 0.25 B&B Thorn EMI 1,000 n/a None 0.5 0.2 Halifax ------------------------------------------------------------------------ Key: (1) Pep providers: B&B = Bradford & Bingley; B of S = Bank of Scotland; (2) Maximum pounds 40 on general Pep, pounds 20 on single company Pep; (3) On first pounds 6,000, 0.5% on amounts above; (4) Single company Pep; (5) Minimum pounds 15; (6) Corporate Pep but other privatisation stocks can be held; (7) Minimum pounds 7.50 for British Airways and privatisation shares, other shares 1% minimum pounds 10; (8) Minimum pounds 10 on single company Pep, pounds 15 on corporate Pep; (9) Minimum pounds 5; (10) Minimum pounds 10. ------------------------------------------------------------------------

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