Why consider Pep transfers? With so much of an individual's investment
being held within Peps, there is a constant need to ensure the assets
invested in are still meeting the aims agreed at the point of purchase.
Within the fund management industry, it is apparent that new star funds
will appear at the expense of some old favourites which may crash and burn
in the future simply due to the constantly changing economic factors which
make fund management so difficult to get right.
However, the fact that choos- ing the correct investment mix is difficult
is no argument for the adviser not to try.
With total Pep values just with fund providers in excess of £58bn,
this is an area that is ignored at one's peril, either from a personal or
The whole set-up of Peps works against providing and implementing cohesive
advice. Single-company Peps get mixed up with general Peps, and just how
much are you allowed in non-qualifying funds at any moment?
There are many different types of Pep transfer product available for the
Fund of funds.
Managed fund services.
And coming soon to a screen near you, fund supermarkets.
The aim of this article is not to argue the relative merits between them,
as they all have a part to play, but rather to look at what the PIA
requires an adviser to think about when a client's collection of Peps is
looked at in the normal advice-giving process.
The PIA helpfully issued regulatory update 68 last year and one of the
issues covered was Pep transfers. The update gave eight different headings
that need to be considered with regard to a transfer – four concentrate on
the reasons why and four on the reasons why not.
In a sense, they are a check- list that, while not requiring total
adherence, do help in the weighing up of the transfer decision.
The first and most obvious one is cost. If in the process of moving from
one plan manager to another, a sizeable element of the client's assets go
in charges and spreads, there needs to be a very strong motivation for the
transfer under one of the other headings.
Costs that need to be included are the initial charges of the successor
plan, together with any exit penalty from the original plan.
The next is the potential for investment loss by being out of the market
for a period. Most Pep transfers are concluded within a calendar month
but, as we have seen of late, world markets have increased in volatility,
which means the timing of a transfer could be all wrong.
Just imagine the client who transfers out when markets are low only to
reinvest at the next peak.
One question that is usefully asked of any company you might want to use
is what process do they have in place to chase tardy payment?
In a similar vein to worrying about potential for capital loss is what
effect the transfer may have on the client's income? If income is vital,
provision will need to be made to mitigate this if at all possible.
As a non-life product, Peps have a slightly convoluted
Some products have them and some do not but the difference between them is
not material to the PIA, which is more concerned about what might happen if
a client decides to transfer his entire Pep portfolio over to another
provider and then decide to cancel during the cooling-off period.
The problem here is that the cash transferred across is going to be sent
back to the client and not the previous Pep provider. This means all the
capital gains tax and income tax breaks will be lost for all time.
It follows then that the client will have to look for assets to invest in
that will be able to provide the sort of returns they would have enjoyed
tax-free within a Pep.
Because the new investment is likely to be taxed in some way, the client
may have to invest in a more risky investment, with a consequence of
The last negative issue highlighted is the format in which the assets are
transferred across plan managers. Most plan managers make provision for
the sending and receiving of cash.
However, there are now plans which allow for assets to be transferred
“in-specie”, that is, there is no need to sell the original holding. While
this looks useful, as it must solve some of the cost and timing problems
highlighted, it needs to be remembered that only a few fund managers are
able to take action on this form of transfer development without IT systems
getting in the way.
The four points above are mostly about applying common sense. Common sense
is also needed when it comes to considering the four headings the PIA
identified for taking positive action.
The first and simplest one is the consolidation of many Pep plans into one.
The benefits to the client of less paperwork, greater clarity of
investment reporting, ease of admin in changing investment aims and, hence,
funds generally being more on top of the investments selected are not
difficult to comprehend.
The ability to spread the risk by transferring to a Pep manager with a
wider range of funds is also easy to justify.
A Pep entirely invested via a fund based on one economy with no sister
funds for mar-ket diversification is less appealing than a plan with 10 or
It also makes sense to invest in a Pep which offers a range of
multi-manager funds. How often has one fund manager been good in all
As clients age, investment strategy is crucial. The older a client gets,
the less risk to either capital, income or a combination of both can be
This holds true no matter how investments are held and it may be that the
funds chosen some time ago, for totally correct reasons, are no longer
appropriate. This can still be the case even when performance has been
good, as age brings with it differ-ent income needs. Not all funds/plans
are structured to deliver such a requirement.
The last positive heading highlighted by the PIA was “Move to
better-performing fund/s.” This is the only one I take issue with.
I can describe why a fund has overperformed or underperformed. I can
speculate as to why it may do either in the future but I could never
guarantee it and, given the pronouncements from the FSA and the Treasury,
neither could they.
I do believe, however, that it is possible to identify managers who have
the skill sets and organisational attributes that point to a probability of
future success. This is probably the only way to justify a change of fund
In conclusion, with markets at what can only be described as an
interesting juncture, it must make sense to review clients' portfolios,
including any Peps held. With the PIA's very helpful guide, RU68, to lead
you, it just got easier.