FOOL SCHOOL
Let's Talk About PEPs

March 7, 2005

If you've got a PEP, 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 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 were scrapped in April 1999 to make way for ISAs. So you can't open a new PEP any more. But if you already have a PEP you'll continue to benefit from the tax-free status although you can't put any more new money into it. In fact, Brits still have around £38b worth of investment funds in PEPs, roughly the same amount they've got in 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 Have Changed

You might not be aware of this, but the rules relating to PEPs were relaxed in April 2001. That's good news for us investors but some PEP providers have been slow to react to these changes and some have even pulled out of PEPs altogether.

Here are the key points:

• The distinction between General and Single Company PEPs has been 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 is abolished; as with ISAs, you will be able to conduct your transactions by phone, fax or Internet.

The changes to the rules should 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'll be able to 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.