Personal finance – PEP up your investments

Even if the recent stock market tumbles were not enough to put you off buying a PEP, the bewildering choice of more than 800 PEP funds is enough to make all but the most dedicated armchair investors back away.

Don’t be put off – it is well worth using your last #6,000 PEP allowance if you think you will be able to leave the money invested for several years, and there are numerous easy ways to narrow down the choices right away.

The first choice is to decide whether or not you want your money to be actively managed. Active management is when a fund manager selects the stocks that he or she believes will do well for investors. The alternative is a tracker fund, which is run by computer and follows the FTSE-100 or All-Share index. Your investment will do as well or as badly as the index (allowing for a small margin of error and the effect of charges). Tracker PEPs are good first choice for investors, says independent financial adviser Jamie Ware, of Bristol-based Churchill Investments. Bear in mind that managed funds are also subject to market highs and lows.

The advantage of trackers is their cost. Legal & General charges 0.5% a year in management fees for its All-Share tracker, Virgin charges 1%. There are no initial charges.

That compares to a typical initial charge of 5% to 6% for an actively managed PEP, and annual charges of between 1% and 2%. The snag is that you need a strong stomach: a tracker will drop like a stone if markets crash.

Active human management can offer more reassurance in a bear market as managers can generally sell up to 10% of their equities and put the money into safer cash deposits. They can also buy shares likely to do well during a recession. But 52% of actively managed UK funds failed to beat their index during the year to 30 June 1998 (source: HSBC).

One way to minimise the gamble is to entrust your cash to a management group with solid performance. A good starting point is to follow the managers and funds voted top performers by investment professionals (see box below). But even big names can stumble, as Schroders found recently.

The management giant has ordered a review of its investment decision-making process to try to halt the poor performance of several of its flagship funds.

If you are not confident making your own investment decisions, then it is worth speaking to an independent financial adviser. He or she will know which funds suit your risk profile and which have recently changed managers (this can lead to a drop in performance). Generally, 3% of the initial charge on each PEP investment is paid to an IFA as commission for its advice.

Alternatively, send for literature from discount PEP brokers (see box). These firms do not give advice but send out useful information to help you decide which PEP to buy. When you buy this way, discount brokers usually hand over their commission, so you save around #180 in charges on each #6,000 PEP.

If you do not want to put your cash into equities, consider a corporate bond PEP, a fixed-interest investment. At a time when the long-term interest rate trend is down, bonds are becoming more popular and their capital value should rise. The Commercial Union monthly income plus PEP is a popular choice, and currently pays 6.74% tax free. Next week, M&G is launching a fund aimed at those who don’t mind taking a bit more risk for a return of 8% to 8.5%.

Isabel Berwick is personal finance editor of the Independent on Sunday.


If you want to follow what the experts think, have a look at which PEP managers win the glittering prizes. Specialist magazine Investment Week has an awards scheme which gives a good idea of who’s hot in the investment world.

This year’s winners included:

Best management group Perpetual

Best investment trust group Flemings

Most improved group Fidelity

Best UK funds

UK Growth Unit Trust River & Mercantile Growth

UK Income Unit Trust Perpetual High Income

UK Growth Investment Trust Fleming Claverhouse

UK Income Investment Trust

Aberdeen High Income


Discount PEP brokers

Financial Discounts Direct: 0500 498 477 PEP Direct: 0800 413186 PEP Shop: 0115 982 5105


Aberdeen Prolific: 0345 886666

Commercial Union: 0845 607 2349

Fidelity: 0800 414161

Flemings: 0500 500 161

L&G: 0500 116622

M&G: 01245 390390

Perpetual: 0500 417417

River & Mercantile: 0171 412 1700

Virgin: 0345 900900

Independent financial advice

IFA Promotion: gives details of three IFAs in your area. Most work on commission.

Call 0117 971 1177 Institute of Financial Planning: for a directory of fee-charging certified financial planners, who are more highly qualified than ordinary IFAs, call 0117 930 4434.

Related reading