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Hitting the high notes over Pep transfers

Why consider Pep transfers? With so much of an individual&#39s 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&#39s peril, either from a personal or

client perspective.

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

discerning adviser:

Fund of funds.

Managed fund services.

Multi-manager wrappers.

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&#39s 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&#39s 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&#39s 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

cancellation/cooling-off regime.

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

increased volatility.

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

20 funds.

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

investment sectors?

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&#39 portfolios,

including any Peps held. With the PIA&#39s very helpful guide, RU68, to lead

you, it just got easier.


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