Corporate bond PEPs give investors a reasonable level of tax-free income and the possibility of capital gains. Although they have only been available since July 1995, there are now more than 60, mostly yielding between 5.5 and 7 per cent or more, free of all income and capital gains tax .
Less risky than traditional PEPs, their unit prices tend to be less volatile as they invest in fixed-interest bonds and stock. These are, in effect, IOUs issued by companies with regular payment of interest and the issuers promising to repay capital on a fixed date.
These are issued in various forms including debentures, Euro-bonds, preference shares and convertibles. The interest must be paid on them before a company can offer dividends to ordinary shareholders.
You can create a self-select corporate bond. But as this is very much a professional's market, investors should look to managed portfolios.
While corporate bond PEPs offer a low-risk investment, this does not mean no risk. If a company goes bust, loans cannot often be repaid. In practice this is unlikely to happen because only blue-chip companies issue corporate bonds.
To sort out the best corporate bond PEPs, look at the yields but also take the charges into account. Then, as income is the main concern, those with the least risk will have the most appeal. Less conservative managers invest in convertibles and preference shares, but in falling markets these suffer alongside ordinary shares.
Remember, you can transfer PEPs into a corporate bond PEP. So this could provide you with a safe parking space for any profits you have made during the current turbulence.
recommended corporate bonds
Recommendations of independent financial advisers
Fidelity Moneybuilder Income: minimum investment pounds 3,000; initial charge 5.25%; annual charge 0.7% from income. Tel: 0800 414161.
M&G Corporate Bond PEP: minimum investment pounds 1,000; withdrawal charge of 4.5% reducing to nil after five years; 1% annual charge from income. Tel: 01245 39039.
CGU Monthly Income Plus: minimum investment pounds 5,000 to receive monthly income; initial charge 4%; annual charge 1.25% from income. Tel: 0181- 681 222.
Standard Life: minimum charge pounds 1,000; initial charge 4%; annual charge 0.95% from income. Tel: 0800 333353.
Virgin Income: minimum investment pounds 1,000; no initial charge; 0.7% annual charge from income. Tel: 0345 959595.