The pros and cons of switching PEPs


You answered a letter from a reader unsure of whether or not to cash in an investment in a Virgin index-tracking PEP. I was surprised to see that you did not suggest switching the PEP investment to the Virgin Income PEP to keep the PEP benefits while avoiding stock market falls. This would gain more income, which might exceed possible future capital gain. My wife and I have both types of Virgin PEPs and understood we could switch between investments. Is it not appropriate to do so now ?

RS, Hertfordshire

Virgin runs two basic investment products - a Growth PEP tracking the FT-SE All Share index and an Income PEP. You can indeed switch between the two. One argument against switching between any funds is that the switching process can be costly. Typically, you will cash in one fund at the lower "bid" price and reinvest in another at the higher "offer" price. And that bid/offer spread could be incurred again when you think it is safe to switch back to a stock market growth fund.

This argument is less strong with Virgin. There is stamp duty of 0.5 per cent when you switch out of its Growth Fund in the first five years but there is no other charge by way of a bid/offer spread. The Virgin PEPs have one price whether you are buying or selling.

One caveat. As with other fund managers, Virgin reserves the right to change the basis of the pricing from the higher cost of buying the underlying share to the lower cost of selling them. It can move to this lower price if money being withdrawn from the fund exceeds new investment. So you could still cash in at the lower price and then, if you want to reinvest later, reinvest in the fund when it is back at its normal higher price basis. This is a potential but almost hidden cost.

Incidentally, this ability to vary the basis on which the price of the units is worked out is available to all unit trust managers and is often in addition to the potential cost of the bid/offer spread. The combination of the bid/offer spread and a switch in pricing basis could lose the investor the best part of 10 per cent.

But back to Virgin's Income PEP. It is 55 per cent invested in the safest 22 corporate bonds (those with the best credit ratings) and 45 per cent in government gilts, by tracking the five-to-15-year gilts index.

The investment aim is to give a high but secure level of income. You get a quarterly income distribution, currently equivalent to 6.5 per cent annually. The objective is not to provide capital growth, though a small amount of capital growth is possible.

The Income PEP is for investors who want an income, compared with the Growth PEP, which is for those who can take a long-term view (five to 10 years) in order to achieve capital growth. Some might argue that the distinction is meaningless. What matters is total return - income and capital growth. And if the stock market is even now threatening to lose another 10 to 20 per cent in value, why not switch to the Income PEP for six months or so and get a bigger return?

There is (of course) an argument against this. Timing. Perfect investment timing means selling an investment at the peak of its value and buying back into it when it has fallen to its lowest value. Private investors have a reputation for perfectly imperfect timing. They buy after a rise in the stock market when everything looks rosy and you can, apparently, only win. They sell after a fall in the market when everything looks gloomy.

The UK and other stock markets have already fallen. Sell now and you sell after the event (notwithstanding that the market may fall further). Incidentally, professional investors in the City of London may be no better at timing than the private investors. Acknowledge the danger of bad timing and remember that you invest in shares only if you can take a long term view. Consider locking your money away and forgetting about it. That means ignoring the ups and downs of share prices.

Building cover

I have been phoning up direct insurers for a quote for buildings insurance. I have found some potentially worthwhile savings but part of the savings stems from a considerably lower insurance value than my current insurer uses. Should I be tempted ?

LM, Norfolk

Never be tempted to insure for a lower figure than you need. If you do, any payout on legitimate claims could be scaled down in proportion to the level of under-insurance, even though the amount of a claim is within the overall amount insured. One way of getting the correct figure is to hire a surveyor to do the job. Alternatively, you can go down the DIY route. The Association of British Insurers (0171-600 3333) publishes a leaflet on how to work out the rebuilding costs.

Write to the personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL and include a phone number, or fax 0171-293 2096, or e-mail Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Billie Piper as Brona in Penny Dreadful
tvReview: It’s business as usual in Victorian London. Let’s hope that changes as we get further into the new series spoiler alert
Life and Style
A nurse tends to a recovering patient on a general ward at The Queen Elizabeth Hospital in Birmingham
Arts and Entertainment
No Offence
tvReview: No Offence has characters who are larger than life and yet somehow completely true to life at the same time spoiler alert
Chuck Norris pictured in 1996
ebooksA celebration of British elections
Arts and Entertainment
Sarah Lucas, I SCREAM DADDIO, Installation View, British Pavilion 2015
artWhy Sarah Lucas is the perfect choice to represent British art at the Venice Biennale
A voter placing a ballot paper in the box at a polling station
Arts and Entertainment
The Queen (Kristin Scott Thomas) in The Audience
theatreReview: Stephen Daldry's direction is crisp in perfectly-timed revival
  • Get to the point
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

SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

Ashdown Group: Marketing Executive - 6 month FTC - Central London

£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

Ashdown Group: Junior Project Manager (website, web application) - Agile

£215 per day: Ashdown Group: Junior Project Manager (website, web application ...

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
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