Investors can put up to pounds 6,000 each tax year in a self-select PEP, investing in their own choice of shares, unit trusts or investment trusts - or a combination of the three.
Self-select PEPs are usually offered by stockbrokers. The broker will deal with all the tax aspects and administration of the PEP. Your broker sends you statements on share sales and purchases, pays dividends and liaises with the Inland Revenue over the tax deducted at source on dividends. This leaves you to decide what to invest in and when to buy and sell your holdings.
Investors with self-select PEPs usually opt to invest in two to three shares initially, up to the annual limit of pounds 6,000.
Mathew Orr, a partner at stockbroker Killik & Co, is a keen supporter of self-select PEPs, but he believes they are only for the more sophisticated investors who study the financial pages.
"We encourage people to buy two or three shares," he said. "For the more obviously green investor, we would suggest an investment trust of some kind to start with."
For the investor who already has a large portfolio of shares or has shares bought through the Government's privatisation programme, it makes sense to transfer existing holdings into the tax-sheltered environment provided by the PEP, particularly those that are yielding high dividends.
If, on the other hand, the PEP forms a substantial part of an investor's savings, the risks of managing shares are quite high. Unless the self- select PEP is used to buy collective investments such as unit trusts or investment trusts, it will not be possible to buy a sufficiently wide portfolio of shares to limit the effect of a single share performing badly.
Self-select PEPs typically have very low or, in some cases, no management fees. The broker will only charge the usual commission for buying and selling the shares: Killik & Co, for example, charges a dealing commission of 1.65 per cent and a dividend collection fee of pounds 7.50 per dividend.
Mr Orr says: "A typical portfolio of two shares, with two annual dividends apiece, would cost pounds 30 a year."
An investor with a large number of small investments will incur disproportionately high charges compared to the size of the portfolio. On the other hand, he will continue to pay the same amount even if his portfolio doubles in a year.
ShareLink has about 50,000 customers who have chosen to go down the self- select route. It charges an annual management fee of 0.75 per cent on top of dealing charges of 1.5 per cent.
Financial advisers other than stockbrokers warn, however, of the disadvantages of self-select PEPs.
Chris Macdonald, managing director of Brooks Macdonald Gayer, says that many people start self-select PEPs with the idea of actively buying and selling shares. "This does not always happen. It takes a lot of effort to research and manage a portfolio properly," he says.
The cost savings on a self-select PEP are also shrinking as the charges on other sorts of managed PEPs are being steadily cut. At best, on managed index-tracker PEPs such as that offered by Legal & General, this means no buying or selling charge, and just a 0.5 per cent annual management charge.Reuse content