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Peps needn&#39t be dogged by poor performance

Nine million Pep accounts still exist despite Peps being clo sed to new investment more than 18 months ago.

For most Pep holders, the best course of action may be to leave the investment alone as many accounts are unlikely to have realised any long-term potential.

But, for IFAs, the Pep market is certainly not worth neg lecting. Peps bought several years ago may now be running into fiveor six-figure sums and changing investment objectives or poor performance may make a transfer the best option.

Simpsons partner Andrew Merricks says: “It is only now becoming clear whether the Pep we bought was best of breed or a mutt. But if a Pep is not performing well, one of the huge advantages is you can simply transfer the fund to another manager without losing the original tax breaks.”

Transfers should not be undertaken lightly. Many IFAs are resentful of what they see as churning by their peers. IFAs stand to make healthy commission from the switch while the client will almost always be hit with heavy costs.

Many Peps carry exit fees in the first few years, on top of which there may be an initial charge on switching into the new fund.

Another downside to transfers is that investment restrictions still apply to Peps. A minimum of 75 per cent of the portfolio must be in funds which invest at least 50 per cent in EU countries. So for those who are looking to inv est more in US or global markets, it may be worth coming out of the Pep altogether.

Isas are not subject to the same geographical restrictions. But after investors have used their £7,000 annual Isa limit, the balance of any money withdrawn from a Pep will become subject to pot-ential income tax and capital gains tax liabilities.

Fund managers and IFAs have been lobbying for the Gov ernment to relax the investment restrictions on Peps and it is possible that change
s will be announced in the next Budget.

Another reason to be cautious when transferring Peps is the time for which the inv est ment will be left out of the market. Unfortunately, transfers can often take as long as a month to process. The vola tile state of some markets could see an investor com ing out at a low and reentering at a high.

Furthermore, for investors who are reliant on an income, a transfer is likely to disturb the regularity of any payments.

A final pitfall to watch out for with Pep transfers is the issue of bundling. Where inv es tors have put money into the same Pep account over several tax years, some fund managers bundle these inv est ments into one. But when the investor decides to transfer, they may not be allowed to move an individual year&#39s inv estment. Ins tead, the fund manager may insist the entire Pep is moved at once or not at all.

The main reason for bund ling is usually a restriction within the company&#39s administration system. Neverthe less, for investors with a large Pep investment which has been built up over several years, bundling can become a serious inconvenience.

Fidelity is one of the bigger fund managers to not oper ate a bundling system. A spokesman says: “The facility to hold an investor&#39s annual allowances separately allows them to transfer the part of their Pep investment that has not done so well while enab ling them to hold on to the investments that are good performers. This unbundled app roach gives investors greater flexibility as well as offering them the chance to meet their investment objectives by giving them access to a wider range of Peppable funds.”

But some investment hou ses argue that many consumers are happy with the system. Invesco head of client services Jane Blatchford claims bund ling does not have to be a bad thing. She says: “The simple reason why we bundle is that is how our administration system works. But in terms of benefits, if you are investing in one fund over three different tax years, you will only get one set of documentation. It gives the inves tor a consolidated view. A lot of investors are very happy with the system.”

Although switching should be looked at with caution, it is important that Peps do not bec ome a neglected part of clients&#39 portfolios.

Hargreaves Lansdown inv estment manager Ben Years ley says: “With all the rush to get into the technology market, people have been forgetting about their Peps. You should not transfer if you only took one out in the last two or three years but you should keep a close eye on them. We do not do many Pep transfers at the moment but it is a market which is set to grow.”


iShares – iFTSE TMT

Tuesday, 7th November 2000.Type: Exchange traded fund.Aim: Growth by investing in technology, media and telecoms companies.Minimum investment: Negotiable with stockbrokers.Maximum investment: None.Investment split: Media 35 per cent, telecoms 25 per cent, IT 26 per cent, software and computer services 14 per cent.Place of registration: Dublin.Isa link: Yes.Pep transfers: Yes.Charges: Annual 0.5 per cent.Commission: None.Tel: 020 […]

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