With the end of the tax year approaching, there are many opportunities to be found in Isa, Pep and Tessa transfers
The end of the current tax year and start of the new one is rapidly approaching. With Isa sales having been flat for some months and a number of markets now looking good value, the opportunity is certainly there. But is the public's confidence in equity-backed investments sufficiently restored?
The signs are not encouraging so far and investors still appear nervous about perceived market volatility. The problem is not so acute for monthly investors, as they can benefit from pound cost averaging.
For lump-sum investors, the solution might be to find a provider that offers a phased investment option. Here, the lump sum is held in cash before being drip-fed into equities in equal installments over, typically, three, six or 12 months. The cash balance can be invested at any time at the investor's request. This facility may help to overcome an investor's fear of investing a lump sum at the wrong moment. Even if this year turns out to be a flat one there is another key market to tap in to for Isa new business ' the transfer market.
In this article, we will look at the marketing opportunity for transfers of the three main types of tax-favoured savings plans ' Peps, Tessas and Isas ' before considering the specific transfer rules for each product type.
Peps may have been closed to new money since 6 April 1999 but they still represent a significant market to advisers and providers because of the importance of Pep transfers. According to the Inland Revenue, based on the position at 5 April 2001, there was still more than £80bn of Pep funds under management. This compares with Isa funds under management of nearly £62bn at the same date.
The majority (57%) of the £62bn of Isa funds was in the cash component, with virtually all of the balance in the stocks and shares component, (the insurance component being something of an irrelevance).
Changes to the Pep regulations with effect from 6 April 2001 gave the Pep transfer market a double fillip. First, the old general Pep/single company Pep (SCP) distinction was abolished. This means that SCPs are no longer restricted to transfers to another SCP and can therefore diversify their holdings and reduce their risk.
Second, investors are now able to transfer part of Pep to another plan manager and not just the whole Pep in the past. This gets around the previous difficulties that arose where plans for a number of tax years with one provider were bundled together and could only be transferred in their entirety.
Ironically, while diversification may be a common objective for a Pep transfer, especially for those holding SCPs, the opposite may also be a motivation. Those who have built up a number of Peps over the years with different providers may wish to aggregate them all under one provider to simplify administration.
Aggregation may be at the expense of diversification but some providers, such as fund supermarkets, will enable the investor to have a diversified spread of funds all under one roof for administration purposes. Product features may also provide a valid reason for transferring. For example, the ability to seek temporary refuge in cash via a phasing facility may be attractive if an investor anticipates a market correction. The other main driver for transfers (whether Pep, Isa or Tessa) is, of course, performance.
It has not been possible to open new Tessas since 5 April 1999, but existing schemes can continue and accept further contributions for their full five-year term. Tessas will therefore become a thing of the past from 5 April 2004. Although the number of Tessas will steadily decline over the next couple of years, there was still more than £16bn in them as at June 2001, according to Inland Revenue statistics.
As Tessas disappear and the number of Peps gradually reduces, Isas will become the predominant transfer market. The Government has promised that Isas will run for at least 10 years from their inception in April 1999. As happened with Peps, the market should become more active as investors build up larger funds and start to pay more attention to performance.
Let us now turn to the actual rules for transfers involving these three types of tax-free investment.
Although it is no longer possible to subscribe to a Pep, transfers between Peps are still allowed. We have already commented on the two improvements to the Pep regulations that came in to force from 6 April 2001 ' the ending of the SCP distinction and the introduction of the ability to part-transfer Peps.
All plan managers must allow whole transfers away to another plan manager. However, there is no obligation upon plan managers to allow part transfers away or transfers in. The receiving plan manager may require transfers to be made in cash, or may accept investments and/or cash. Transfers away and transfers in may both be subject to charges.
Regardless of the nature of the existing Pep, whether it is managed or self-select or invested in pooled funds or shares, the new Pep does not have to be administered or invested in the same way as the existing plan. It simply has to comply with the Pep rules on permitted investments. An investor holding multiple Peps with one manager (such as a former single company Pep and a general Pep) can ' if they wish and with the manager's agreement ' merge the Peps into one plan or move investments between the Peps. This does not count as a transfer.
An Isa manager must allow whole transfers away but is not obliged to make part transfers away or accept transfers in. Transfers can be in the form of cash, investments or a combination of the two.
In practice, most receiving managers are likely to require transfers to be made in cash. Transfers away and transfers in may be subject to charges.
Investors can transfer their current (tax) year's subscriptions in whole and/or previous years' investments, in whole or in part. Funds transferred between Isas must always remain within the same investment component. Additionally, transfers of current year's subscriptions must remain in the same type of Isa account (maxi or mini). For example, the cash component of a maxi Isa can only be transferred to:
• Cash component of a maxi Isa, for current year's subscriptions
• Cash component of a maxi Isa or a cash mini Isa, for previous year's investments.
If the Isa fund built up from current year's subscriptions is transferred to a new manager, the current year's subscription (but not any investment growth) counts towards the subscription limits. Any unused balance of the normal subscription limits can be used up by making further subscriptions to the new Isa manager. Transfers of previous years' investments do not affect the current year's subscription limits.
A Tessa provider must allow transfers away to another Tessa (but not an Isa), but is not obliged to accept transfers in. Transfers away may incur charges, possibly in the form of loss of interest or bonuses.
To retain the tax exemption, investors must not attempt to withdraw and reinvest, but must ask the existing Tessa provider to transfer the account to the new provider. The investor's subscription record is carried over and subscriptions can continue to be made to the new account provided the limits are not exceeded.
The capital from a matured Tessa (but not the interest) can be transferred into an Isa provided the transfer is completed not more than six months after the Tessa's maturity date.
The transfer may be made into an existing cash mini Isa, into the cash component of an existing maxi Isa, or to a stand-alone Tessa-only Isa. The amount transferred does not count towards the Isa subscription limit.
There is still around £80bn of Pep funds under management compared to £62bn in Isas.
As Tessas disappear and the number of Peps reduces, Isas will become the predominant transfer market.
Funds transferred between Isas must remain within the same investment component.
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