Swap shop keeps PEPs on the boil

Should you trade in your fund for a better performer? asks Ben Livesey
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The Independent Online
You cannot buy a new personal equity plan anymore but you can still trade one PEP fund for another one, either with the same provider or another firm.

The PEP transfer market is going to be big business in the next few years. The advantage of swapping your PEP, if nothing else, is that it gives you the chance to swap a poor performer for something more consistent. PEPs, like their successors, ISAs, are merely tax-free wrappers around stock market funds - be they unit trusts, investment trusts, Oeics (open- ended investment companies) or corporate bonds. Performance varies greatly. "You do need to ensure that your investment is in a good- performing fund, even if you only took out a PEP in April," says Warren Perry, an independent adviser at Whitechurch Securities. "It is no good having tax breaks that are not backed by good performance."

Among the big fund managers, Perpetual has 21 funds that are PEPable. Its growth funds and income funds all charge a 5.25 per cent initial fee on the amount you invest and levy between 1.25 and 1.5 per cent in annual management charges.

Jupiter has a 5 per cent initial charge and a 1.5 per cent annual charge. On PEP transfers it is operating a 1 per cent discount on its initial charge until the end of the year.

Fidelity is attracting PEP transfers because of its low charges. Its MoneyBuilder range, which has a UK index tracker fund, a corporate bond, a growth fund and a fund of funds, has no upfront charges and no exit fees. Annual fees are also low - between 0.5 and 1 per cent. M&G also has low costs on its Managed Growth, Managed Income, Blue Chip, Index Tracker and Corporate Bond PEPs.

You should be cautious about PEP transfers. The main reason for swapping should be long-term underperformance. If your fund fails to match the average growth of its index (for example, an income unit trust would be matched against the UK equity and bond index) then it is time to switch. But you need to look beyond short-term statistics. Mark Dampier, head of research at broker Hargreaves Lansdown, says a top fund in the first quarter can drop down the field by the third quarter, with as little as 1 per cent or 2 per cent in it. "This does not warrant any transfer at all. You have to be careful not to jump out of a poor fund, to a top-performing fund, only to see the thing turn around six months later."

When you transfer a PEP you may have to pay an exit fee. You will certainly have to pay an initial charge of around 5 per cent with the new manager, plus annual management fees. If you decide you do not need advice on transferring your PEP, you can cut costs by going to a discount broker and investing on an execution-only basis - here the broker will refund you the bulk of the initial charge.

Before you transfer PEP funds you should check if the plans have been "bundled". If you have taken out PEPs over successive years with one provider, they may have been grouped together for administration ease. Perpetual is one fund manager that does this. If this is the case, you will not then be able to split them up and transfer them to different PEP funds. "If you want to transfer your PEP plans and they have been bundled, it is all or nothing," says Ann Davis, head of UK direct business at Fidelity.

n Contacts: AIB Govett, 0171- 378 7979; Fidelity, 01732 361144; Hargreaves Lansdown, 0117-988 9880; Jupiter, 0171- 412 0703; Killik & Co, 0171- 461 4400; M&G, 0171-626 4588; Perpetual, 01491 417000; Royal & SunAlliance, 01733 390000; TQ Direct, 01902 570570; Whitechurch Securities, 0117-944 2266.

n Ben Livesey writes for `Moneywise' magazine.

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