What Can You Do With PEPs?

First of all let's run through a few basics about PEPs. If you've got one or more of them, you'll probably know that they used to be a method of investing money in funds or shares without having to pay tax on the capital or the income.

They were first introduced in 1987 and came in two types:

• General PEPs: these enabled you to invest up to £6,000 a year in shares, unit trusts and corporate bonds.
• Single Company PEPs: you could invest up to £3,000 a year into these but, as the name suggests, you could only invest in one company at a time.

PEPs got off to a slow start, with only half a million accounts a year being opened in the late 1980s. They rapidly increased in popularity throughout the 1990s though. In 1998/99, the last year in which they were available, 4.6 million PEP accounts were opened. In April 1999, the PEP system was scrapped and was replaced by ISAs.

Existing PEPs continue to enjoy their tax-free status and many of us still have significant amounts of money held within such accounts. Indeed, as at April 2005 it's estimated that we still had over £70bn invested in PEPs, which is more than we have invested in share ISAs.

While you can withdraw income from investments and the interest from cash deposits within your PEP, there are conditions regarding the interest on any cash deposits you may have -- you cannot draw out more than £180 in any tax year, otherwise all the interest becomes taxable.

However, you can change the investments within your PEP at any time. And you can also change your provider if you're not happy with annual management charges. Your new provider should be able to sell your existing investments for you and put the proceeds into their own funds but, not surprisingly, most of your old providers will charge exit fees, so watch out for these.

The rules relating to PEPs were relaxed in 2001, so that they were more closely aligned with the rules for ISAs. The key changes were:

• The distinction between General and Single Company PEPs was abolished.
• You can merge General and Single Company PEPs, therefore paying lower charges if annual fees are capped. Previously you were only able to merge General PEPs.
• PEPs can hold listed shares from any recognised Stock Exchange in the world, as well as corporate bonds, gilts, and a wider range of investment funds.
• You can transfer part of the contents of a PEP to another PEP manager, rather the whole lot, even if your PEPs have been "bundled" together.
• The requirement for a written request to withdraw funds was abolished; you can conduct your transactions by phone, fax or Internet.

The changes to the rules make it much easier to switch the investment mix of a PEP portfolio, particularly in the international markets. And if you're unhappy with current performance or lack of investment choice you can transfer to a new PEP manager (or managers) with much more simplicity. The fact that you can also transfer part of your PEP investments means that, if you've ended up with a series of PEPs in a "bundled" account, you'll be able to hive off part of the fund if you choose to do so.