Around six million UK investors are still sitting on personal equity plans (PEPs), the original tax-free savings scheme.
Thanks to a series of rule changes introduced in April, it is time for these people to dust off their documents and pep up their PEPs.
Everyone who holds a PEP now has the freedom to spread their investments more widely, and for those with single-company PEPs (SCPs), the changes allow much-needed diversification.
PEPs were introduced by the Conservatives in 1986 to expand share ownership and encourage investment in UK industry.
The plans were closed to new contributions in April 1999, when stocks and shares individual savings accounts (ISAs) were introduced in their place.
But approximately six million people still have a total of #80 billion in PEPs. The maximum investment of #91,200 could easily have turned into #250,000.
But the rules that governed PEPs were more restrictive than their ISA alternatives. It is this anomaly that Chancellor Gordon Brown has moved to correct with the liberalisation of PEP rules.
As PEPs were designed to boost our domestic economy, someone investing the full #6,000 a year had to put at least three-quarters of their money in a ‘qualifying’ fund: one predominantly invested in the EU.
Those with large PEP holdings, but few other investments, will have unbalanced portfolios with little exposure to US, Far East, or emerging markets.
A second change involves the scrapping of ‘bundling’ rules. These meant a PEP investor could only buy from one investment house a year, and generally had to sell their holding in one block.
Jason Hollands, an IFA with Bestinvest, says: ‘Because you could only have one PEP manager a year, many people have second division funds in their portfolio.
‘For example, you may have gone with a manager because they had a strong European fund. But if you wanted a little bit of UK Smaller Companies as well, you were stuck with the fund they had.
‘This is a chance for people to look at their asset allocation and get their portfolios into shape.’
Splitting your holdings may not be straightforward as many investment houses lack the technology to handle partial transfers within a tax-free wrapper.
If you want true flexibility, it may be worth moving your entire PEP portfolio into a self-select ISA, where you do have the freedom to reassign your assets between funds, bonds, gilts and even direct equities. A fund supermarket provides a similar, if slightly more limited, service.
It is the scrapping of the rules on single company PEPs that is the most timely change of all. As the name suggests, these plans could only hold one share at a time. Investors used SCPs as a tax-free wrapper to shield shares they received from their employer.
With rising stock markets this exposure to a single stock was not too much of a problem. But in the last 12 months many have seen the value of their SCP plummet.
The new rules end the distinction between SCPs and standard PEPs, allowing money to be transferred into a fund, such as a unit trust or investment trust, without leaving the PEP wrapper.
For those with such a shareholding, the ability to diversify should be grabbed with both hands.
Peter Shipp, chief executive of the PEP and ISA Managers’ Association, says: ‘Some people are sitting on #250,000, and there are rumours that one or two investors have SCPs worth #1 million, having taken profits and moved from one stock to another.’
Hollands adds: ‘For the vast majority of people with SCPs it is better to move to a fund now they have freedom of choice.
‘It is pretty dangerous for an investor with a portfolio of less than #30,000 to be in an SCP.’
However, there is speculation that some less scrupulous financial advisers may now encourage clients to transfer funds unnecessarily allowing them to pocket extra commission.
Mark Dampier, head of research at IFA Hargreaves Lansdown explains, ‘Lots of people have most of their PEP funds invested in the UK or Europe, but they don’t have to drastically change their portfolios.
‘A well balanced portfolio may be 50% UK and 10 to 15% Europe anyway, and individuals may well have other investments.’
The best protection against is to ensure that your adviser provides a ‘key features’ document stating the rationale behind a transfer. The cost implications should also have been taken into account in coming to this conclusion.
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