The cheapest way to invest in your PEP

Know what you want? Head for a discount house, writes Harvey Jones

Read this with caution, you might just kick yourself. If you have just bought a PEP, you may not realise that you could have saved yourself pounds 300 by buying through a discount house.

Discount houses are the forgotten heroes of financial services. Many people know little about the services they offer and don't realise how much money they can save.

There are around a dozen discounters in the UK selling PEPs, pensions, with-profits bonds and life assurance at cut-price rates. They save you money by reimbursing nearly all the commission paid to them by the product provider, which most financial advisers keep. This commission is funded by the charges you pay on financial products. Even when you buy a PEP direct from the company, you still pay commission, except the provider keeps it for itself.

There is no catch to discount services and there are no hidden charges. They are streamlined organisations working to tight margins. They can afford to rebate nearly all commission by having low overheads and selling millions of pounds-worth of policies every year.

They either reinvest the commission into the product or pay it as cash. The other reason the service is so cheap is that they do not give any advice. They run what is known as an "execution-only" service: investors do their own research and come to their own decisions; the discounter simply arranges the transaction.

"Normally you save money by cutting out the middle man," says Sean Kingston, director of discounter Hargreaves Lansdown. "In this instance the middle man is actually reducing the cost, and that is rarely understood by the investing public."

Hargreaves Lansdown rebates up to 5.5 per cent commission on many PEPs - a saving of up to pounds 330 if you pay the full pounds 6,000 into a PEP. For example, it will save pounds 300 on Perpetual, pounds 240 on Jupiter and pounds 300 on Invesco products.

The company makes its money on the 0.5 per cent annual renewal commission paid on a PEP. It comes out of the annual management charge on the fund itself (usually 1 to 1.5 per cent), Mr Kingston says.

Hargreaves Lansdown also offers discounts on personal pensions, returning 80 per cent of the initial commission. In addition, it offers corporate and with-profits bonds and term assurance at a discount. Other discount houses also rebate pensions but not all of them: some are deterred by their complexity.

Chartwell Investment Management specialises in with-profits bonds, which are insurance-based investments with a notoriously high level of commission, often as high as 6.75 per cent. Chartwell returns a flat 5 per cent of commission on all bonds and keeps the remainder. It sells pounds 1m of with- profits bonds every day. Chartwell charges a fixed fee on other products, for example pounds 20 for setting up a PEP with all initial commission returned and pounds 35 for a unit trust.

Paul Penny, managing director with Financial Discounts Direct, says the type of people using discount houses varies. "Some people are very clued up and know what they want. Others are simply obsessed with getting the biggest discount. They might choose their discount house based on whether it provides a stamped, addressed envelope, for example."

Discount houses have come in for criticism for selling products regardless of whether they are suitable for the customer. Mr Penny recognises this can be a problem. "It is difficult to know whether somebody is buying the right product. But on rare occasions I have advised against somebody buying something that is not in their best interests," he says. "We are not against financial advisers. If you are comfortable with buying a PEP without advice, then that's great, but if not it could be a false economy and it may be better to pay for advice."

Mr Penny says discount houses have to be careful about pointing customers in the direction of particular products as they are not regulated by the Personal Investment Authority and this could be seen as giving advice. Some discount houses, such as Hargreaves Lansdown, do have an advice arm, although, of course, if you choose this option, your discounts will be reduced.

Janice Thomson, managing director of discounters Chelsea Financial Services, warns that when buying through a discount house it is important not to be dazzled by the size of the discount; it is the quality of the product that matters.

"PEPs with the biggest initial charges will inevitably give the biggest discount, but don't think that necessarily means they are the biggest bargain," she says.

If a PEP pays 5.25 per cent initial commission, the discount will inevitably look more attractive than on a PEP only paying 3 per cent, she says. But performance is what counts.

"A good fund will outperform a poor fund by 1 per cent in no time flat. Jupiter is performing better than Perpetual, so the 1 per cent difference in discounts is irrelevant," Ms Thomson says.

BEST PEP SAVINGS

Discount house Best saving on pounds 6,000 PEP

Chartwell Inv Management pounds 300: Invesco/Perpetual

01225 446556

Chelsea Financial Services pounds 330: Save & Prosper

0171-351 6022

Financial Discounts Direct pounds 330: Newton

0500 498477

Hargreaves Lansdown pounds 330: Save & Prosper

0117 900 9000

Allenbridge pounds 300: Jupiter

0800 339999

PEP Direct pounds 315: Newton

0800 413186

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Voices
voices
News
general electionThis quiz matches undecided voters with the best party for them
Arts and Entertainment
Keira Knightley and Matthew Macfadyen starred in the big screen adaptation of Austen's novel in 2005
tvStar says studios are forcing actors to get buff for period roles
News
Prince William and his wife Catherine, Duchess of Cambridge show their newly-born daughter, their second child, to the media outside the Lindo Wing at St Mary's Hospital in central London, on 2 May 2015.
news
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before