It is sometimes surprising how easily we can forget things, from picking up that last minute birthda...
It is sometimes surprising how easily we can forget things, from picking up that last minute birthday or anniversary gift to completing our tax returns on time.
So when it comes to tax-free investing could we ever forget about the personal equity plan with all its wonderful complexity?
Well you may be surprised to learn that many investors still view their Peps as something that has been frozen in time and like the numerous Millennium time capsules that have been buried, can only be opened at some future date unknown to man or beast.
Fortunately, those of us with better memories and a more realistic view to long term financial planning are able to take a more sensible view on how to maximise the tax free advantages of Peps, which for many investors will form a substantial part of their investment portfolio.
End of the beginning
Peps may have come to the end of their natural life with the arrival of individual savings accounts (Isas) in April 1999, but there is no reason for investors to suffer lacklustre performance from their existing holdings. Like any other investment, they need to be monitored regularly - and if they lose their competitive edge then it's time to take action.
If an investor was a serial Pep investor and every tax year made full use of their Pep allowance, it is likely the critical mass of their investments are in the UK. This is because of the qualifying restrictions, where only 25% of the investment could be outside the UK, and later outside Europe.
Although no one can make fresh investment into Peps, it is important to review a client's Pep plan on a regular basis to ensure they can continue to meet long-term investment objectives as they change over time. That's where the benefit of a Pep transfer or Pep switch, comes into its own.
Maximising the benefits
There remains considerable misunderstanding among investors as to what they can and cannot do with poorly performing Peps or plans that no longer meet expectations for income or capital growth. Pep transfers have only developed in significance over the last 18 months or so. But they are an important ingredient in successful investment, and gradually becoming more commonplace. Figures from the Association of Unit Trusts and Investment Funds (Autif) show that 23% of Pep holders have transferred their Peps in the last year.
So what can be done to meet the needs of the hundreds of thousands of Pep investors whose plans may no longer be delivering what is expected or needed?
There are two approaches that can be adopted which will allow investors to maintain the tax free shelter which a Pep provides but will also allow them to maximise their benefits.
Firstly, switching between funds within an existing plan manager could have the desired effect. This is easy to do - by simply asking the plan manager to make a switch and it will be done, although there may be a charge for doing so. Moving investment funds within existing Peps is relatively simple, although you need to be careful and aware of the rules concerning qualifying and non-qualifying investment funds. Pep restrictions on investments mean that only some funds are available to transfer into, and choice will be restricted further if the investor is looking for an international orientated holding such as a Japanese or North American fund.
Secondly, there is the right to consider a transfer of existing Pep investments to another investment manager.
So why would you want to transfer instead of switching?
There is no doubt that a number of investment groups have built outstanding investment records over the years, either generally across their range of investment funds or more often in selected investment areas such as the UK or Europe.
Although it would be wrong to make too much of a generalisation here, in many cases the major reason why an investor would consider transferring their complete Pep portfolio would be to benefit from a wider choice of better performing funds. The choice of fund manager will also play an important part, as investors need to feel a level of comfort that the new manager of their Pep can do a better job than the last one.
The point about potential performance concerns was highlighted by a recent published study.
This survey concentrated on the UK All Companies Sector, where the greatest percentage of Pep money is. Ranked in quartiles, the survey found of the £54.5bn invested in the sector only £9bn (16.5%) was in the top quartile.
So how can you judge if any fund is not up to scratch?
It might be growing in value, but that doesn't mean it is performing well. Comparisons need to be made with the performance of similar investments. Even if a fund has increased by a reasonable amount, it might still be underperforming against its sector.
Alternatively, the fund, and others in its sector, is losing money. If this is the case, the poor performance maybe down to local market conditions.
The decision then is whether there is a belief that this market will recover, if not, then a switch of fund with the same manager may be an option or alternatively it may be more appropriate to arrange a full transfer to another manager with proven expertise in another more lucrative market.
But performance or the lack of it should not be the only reason for recommending a transfer or switch.
A portfolio of funds should be diversified, not just in terms of assets, but also geographical distribution. If a Pep portfolio is predominately UK based, as many of the original Peps are, then there is an opportunity to diversify the investment across other markets such as Europe the USA or Asia (within the Pep limits)
By transferring a Pep to another manager, you may be able to fulfil more easily your clients investment objectives, especially if these have changed over time.
For example, as the investor grows older and nearer retirement,
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