Investors who can take a long-term view of their savings (five, 10 or more years) can use a growth PEP to save towards specific future costs - to clear a mortgage, pay school fees or store up funds for retirement.
Most growth-oriented PEPs pay little by way of dividends. The investment managers will pick companies where the investment return comes in the form of rising share values. Equity income plans, which aim to pay out a modest but rising income derived from share dividends, may also be suitable for long-term growth, if the income is reinvested in the plan.
But how do you choose a plan? A lot of people base their decision on performance tables, but choosing a PEP is much more than just picking a single fund. "We encourage people to treat the PEP as a mini-portfolio," says Jason Holland of BESt Investment. "We recommend splitting money between funds to get a broad exposure and to spread the risk. That is very important for long-term growth. You should not have all your eggs in one basket." In particular it is important for growth investors to maximise overseas holdings. Britain could be risky with the All-Share Index standing at record levels and the added uncertainty of a general election in the next 18 months.
"It is a bit of a myth that PEPs mean UK investments. A lot of managers have non-qualifying funds which invest predominantly outside the UK, and even their qualifying funds may be internationally diverse," says Mr Holland. A qualifying fund is one you can use to invest the full annual general PEP limit of pounds 6,000. To qualify, a fund need have only 50 per cent of its money in Britain or European Union companies. The rest can be invested internationally. Alternatively you can invest pounds 1,500 of the pounds 6,000 limit in a non-qualifying fund - one which may have no investments in Britain or the EU. The best growth over the past 10 years comes from far-off places. Figures from Micropal, a performance monitoring firm, show that an investment in Gartmore Hong Kong has risen nearly nine times in value. Other Asian funds dominate the 10-year league tables. Over five years, Thailand, Hong Kong and US Smaller Companies feature prominently.
"The key thing when you are looking for a growth PEP is to focus on the managers who have a consistently good record across a range of funds covering most markets, such as Perpetual and Morgan Grenfell. They are good in each area. Some fund management groups have one-star funds with poor performers. The best companies may not always be number one in the league tables but year-on-year they are up there among the top performers," says Mr Holland.
Consistency of performance is also one of the key qualities sought by Allenbridge, a firm of analysts. "We look for managers who will slightly outperform the market on a regular basis. We are not looking for the fund which doubles this year and may go down next year," says Anthony Yadgaroff of Allenbridge.
He reckons some 70 per cent of performance comes from being in the right market, 20 per cent in the right sector and 10 per cent in the right stock. "Choose a manager who has the ability to choose the right markets," says Mr Yadgaroff. "Some funds have a broader investment remit than others, allowing them to move between markets."
But be wary of investing all your money in one go. "If you have pounds 6,000, you could invest it at a rate of pounds 500 a month. Then, if the market is very high when you begin to invest, you have not totally committed yourself," says Peter Smith of Hill Martin, independent financial advisers.
That is not so easy for people who want to invest the full pounds 6,000 by the end of the tax year. But a number of companies will feed it into the market slowly, including Fidelity, Foreign & Colonial, Henderson TR, Equitable Life and Legal & General.
q You can obtain a copy of BESt Investment's magazine, BESt PEP, by ringing 0171-321 0100. If you buy a PEP through BESt Investment, it will donate 1 per cent of the value of your investment to a charity of your choice.Reuse content