The easy way to be an investor

PERSONAL EQUITY PLANS More than pounds 20bn of private investors' money is now tied up in PEPs. On these and following pages, we explain what they are (particularly the new corporate bonds), discuss how to measure them, and answer the key questions

THERE was a time, well within living memory, when investors were penalised by an unearned income surcharge on top of substantially higher rates of income tax on earnings than now apply. The 15 per cent surcharge was not abolished until 1984-5.

How things have changed in little more than a decade. Investors are no longer seen as parasites living off past gains, but as responsible individuals building up nest-eggs to provide for their own financial needs in future, instead of living off the state. To speed the process, the then Chancellor, Nigel Lawson, introduced Personal Equity Plans (PEPs) at the beginning of 1987.

In keeping with their new status, investors have also been given tax- free status on money held on deposit in special Tax-Exempt Special Savings Accounts (Tessas), and since last month anyone with a taste for a bit of speculation can buy both shares in UK and EU companies and bonds issued by UK companies, and hold them in a PEP, on which they pay neither income tax on the dividends nor capital gains on any profits.

Any investor over 18 can start a PEP by investing up to pounds 6,000 each financial year in a portfolio of shares or bonds in companies quoted on the Stock Exchange, and managed like unit trusts by a professional manager. The investor pays the manager through an initial charge deducted from the first investment, or sometimes a withdrawal charge if the PEP is sold within, say, five years, plus an annual management charge, which can be deducted either from the capital value of the fund or from the dividend income.

In addition, investors can buy up to pounds 3,000 of shares or bonds in a single company and hold them as a "single-company PEP". Many PEP managers also operate savings schemes that allow investors to invest smaller sums over a regular period.

Unlike Tessas, which have to be maintained for five years to retain their tax-free status, investors can pop investments in a PEP and sell them again without paying tax on either income or the capital gains they have already made, although most PEP managers recommend investing for at least three years to minimise the risk of having to sell when stock markets are depressed.

Although they appeal mainly to sophisticated investors, willing to contemplate the possibility of loss, share PEPs have attracted almost pounds 20bn since they were introduced, including pounds 5bn in the peak year of 1993.

Until now, of course, investors could only hold company shares in a PEP, and although shares historically have gone up more often than they have gone down in value, we know from investment health warnings that they can go down in value at any time. This makes them unattractive to investors who do not want to runthe risk of losing capital at any price, and do not want to wait for losses to be recouped.

And in any case, the dividends on a sum of money invested in shares tend to be less than the interest on the same sum of money invested in a bank or building society. After tax, the dividend on a typical share at present tends to be around 4 per cent of the share price. Even if the share is held in a PEP, the yield will typically be only around 5 per cent. On shares expected to show the fastest capital gains, the yield will be smaller still.

In practice, PEPs have tended to appeal to investors looking for long- term growth, and to higher-rate taxpayers who appreciate the chance to save 40 per cent tax on their investments. Anyone looking for income alone would still go for a Tessa bank or building society deposit or a guaranteed income bond.

Government stocks and loan stocks issued by companies, usually knows as corporate bonds, were not eligible to be held in a PEP until 6July, ostensibly because they already offered higher dividends than shares and investors could not expect most of the advantages and few of the risks of an investment in business, and tax breaks on top of that..

But companies have long complained that they had to rely too much on issuing shares or borrowing from banks to raise capital. UK companies have always been able to issue bonds just like the government, but in inflation-ridden Britain, the interest they have had to pay on bonds has often been uncomfortably high. In recent years, many foreign companies have raised capital in sterling by issuing Eurosterling bonds offshore, but these are traded in multiples of at least pounds 100,000, which in effect prevents the issuers from tapping into individual UK investors.

As anyone who takes even the most cursory glance at the personal finance pages, or discusses investments in the saloon bar or the club will know by now however, the Chancellor decided last year to lift the limitations and allow investors to hold Corporate Bond PEPs, containing fixed-interest securities instead of shares. For at least the past three months, fund managers, financial advisers and the financial pages have talked of little else. At least three dozen managers have launched corporate bond PEPs, either by starting up new funds or by "wrapping" existing fixed-interest unit trust funds in PEP guise.

Each fund has its own character, and fierce arguments have developed over the pros and cons of different types of funds, different ways of charging fees and whether to buy now or wait and see what else turns up. We try to sort out some of these issues.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Mortgage Administration Team Leader

Negotiable: Recruitment Genius: This company prides itself on its ability to p...

Recruitment Genius: Mortgage Advisor

Negotiable: Recruitment Genius: This company prides itself on its ability to p...

Ashdown Group: Solvency II Project Manager - 10 month contract - £800 p/d

£800 per day: Ashdown Group: A highly successful, global financial services co...

SThree: Trainee Recruitment Consulant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250...

Day In a Page

Mullah Omar, creator of the Taliban, is dead... for the fourth time

Mullah Omar, creator of the Taliban, is dead... again

I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

Margaret Atwood on climate change

The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

New Dr Seuss manuscript discovered

What Pet Should I Get? goes on sale this week
Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

The cartoon hedgehog leading the way into a whole new reality

Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
Ants have unique ability to switch between individual and collective action, says study

Secrets of ants' teamwork revealed

The insects have an almost unique ability to switch between individual and collective action
Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

Donovan marks his 50th year in folk

The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

Simulator recreates thrill of F1 circuit

Rory Buckeridge gets behind the wheel and explains how it works
Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

Twitter accused of 'Facebookisation'

Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
Jane Birkin asks Hermès to rename bag - but what else could the fashion house call it?

Jane Birkin asks Hermès to rename bag

The star was shocked by a Peta investigation into the exotic skins trade
10 best waterproof mascaras

Whatever the weather: 10 best waterproof mascaras

We found lash-enhancing beauties that won’t budge no matter what you throw at them
Diego Costa biography: Chelsea striker's route to the top - from those who shared his journey

Diego Costa: I go to war. You come with me...

Chelsea's rampaging striker had to fight his way from a poor city in Brazil to life at the top of the Premier League. A new book speaks to those who shared his journey
Ashes 2015: England show the mettle to strike back hard in third Test

England show the mettle to strike back hard in third Test

The biggest problem facing them in Birmingham was the recovery of the zeitgeist that drained so quickly under the weight of Australian runs at Lord's, says Kevin Garside
Women's Open 2015: Charley Hull - 'I know I'm a good golfer but I'm also just a person'

Charley Hull: 'I know I'm a good golfer but I'm also just a person'

British teen keeps her feet on ground ahead of Women's Open
Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

Our choice is years of Tory rule under Corbyn or a return to a Labour government

Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'