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Pep shake-up adds flavour

The latest changes in the Pep and Isa rules are highly sign ificant for anyone involved in the savings industry.

A collective vote of thanks should go to the 12 industry bodies and consumer groups, as well as the 23 IFAs and Isa pro viders, which lobbied the Treasury earlier this year in a coherent and persuasive manner.

The maintenance of the Isa limit at £7,000 for the next five years effectively increases the industry&#39s potential earnings from Isas by 40 per cent on an annual basis.

These are significant figures when you take into acc ount that, in the first quarter of the current tax year, £4.3bn of the £9.1bn invested in Isas was in the high-margin equity sector which typically has an annual management charge of between 1 and 1.5 per cent.

The changes in the Pep rules are even more mouthwatering for the industry to contemplate. The most important changes are:

l Peps are no longer subject to geographical investment restrictions.

l Peps can be unbundled and split between different fund managers.

l Single-company Pep money can be reinvested on the same basis as general Peps.

These changes amount to the most significant shake-up of the rules since Peps were intoduced by Chan cellor Nigel Lawson 12 years ago and should give IFAs the best possible reason to re-examine the portfolios of those inv es tors who have prudently taken advantage of their Pep allowances.

These are the sorts of questions IFAs should be considering for client portfolios:

l Is single-company exposure appropriate or should this holding be switched into a more broadly diversified collective vehicle?

l Is the portfolio too heavily weighted towards UK and European stocks at the exp ense of global thematic or overseas holdings?

l Should the portfolio be spread among more mana gers? Typically, good UK and European managers have not shown equally effective expertise further away from home, so other managers or funds might be appropriate.

The competition for inves tors&#39 money is likely to inc rease further as investors can now use the phone, fax or internet to req uest fund withdrawals rather than having to write letters, so making transfers bet ween providers that much easier.

This provision will go down well with fund supermarkets, in particular, where it will now be easier than ever for the investor to switch between different providers, no doubt enticed by all sorts of special offers, discounts and so on.

The Labour Government likes to project itself as the champion of the consumer so, unsurprisingly, a significant portion of the Treasury statement made reference to Cat standards. The standards will now include an interest rate floor for cash Isas and a cap on the charge for equity Isas.

According to Treasury figures, a typical saver investing £3,000 in a Cat-standard equ ity Isa would pay £35 less in charges than someone investing in a non-Catmarked Isa. In reality, the £35 saving is relatively insignificant and could easily be accounted for by a change in sentiment in any major equity market.

Although most fund hou ses do not offer Cat-standard products, over £1bn of equity Isa money has been attracted into them and they are important in allowing consumers who insist on a lower charging structure to have access to collective equity investment.

As we enter our third Isa season, it seems clear that many of the original critics have been surprised by the overall success of the scheme. As the number of products proliferates across themes, countries and asset classes, it will become increasingly important for IFAs to understand the different inv estment approaches they can offer their clients.

For those with the necessary expertise in this area, the future looks bright.


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