Money: A-Z of finance

Clifford German
Sunday 23 October 2011 08:30

C is for corporate bond PEPs, which were launched with a great fanfare last summer as the latest and best investment product to hit the streets. They are invested in fixed-interest loan stock, convertibles and preference shares offered by UK companies and expressed in UK currency, and in UK government stocks.

They offer the tax-free advantages of a Personal Equity Plan - no income tax, no capital gains tax liability, not even if you are a higher-rate taxpayer, and there is no need even to report them on your tax form. You do not lose the tax advantages you have already received if you sell them.

Most providers charge an initial fee and an annual management charge, but corporate bond PEPS were launched at a time of growing competition between providers and average charges are lower than on most of the early PEPs invested in shares.

The average yield on corporate bond PEPs will vary as prices rise and fall. But the average dividend yield on a corporate bond PEP is currently around 8 per cent a year, roughly double those of most PEPs invested in ordinary shares. Loan stocks and gilts do go up and down in value of course, because the relative value of the fixed interest your loan stocks earn goes up when interest rates in the rest of the economy go down, and the value falls if interest rates available elsewhere rise.

In fact interest rates have eased since last July, and the value of the first corporate bond PEPs has actually risen by an average 5 per cent. Net purchases of corporate bond PEPs jumped to a record of pounds 163m in February, 35 per cent of the total pounds 468m invested in PEPs of all kinds.

There is always a risk that an individual company can go bust and its loan stocks become worthless. But with the exception of a handful of single- company corporate bond PEPs that are invested in the stock of a single named company, the vast majority of corporate bond PEPs are invested in at least 20 different stocks, so the risk of wipe-out is limited.

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