While the change in Pep regulations that came into force in April 2001 offers investors more opportunity to diversify their portfolios, they ought to be aware of potential exit fees and initial charges before doing so
When the new Pep regulations came into force on 6 April 2001, UK investors gained an opportunity to broaden their investment portfolios and make even better use of the tax-efficient vehicles available to them.
There are two key benefits of the changed Pep regulations: diversity and consolidation. This article looks at both benefits and discusses how they can enhance the investment portfolios of your clients.
Peps gained increasing popularity during the 1990s as their investment limits and flexibility gradually developed. However, one constraint remained ' their 75% sector bias towards the UK and Europe. While this geographical bias may not have necessarily disappointed investors, it did make creating an internationally diversified portfolio more difficult.
The new regulations put an end to this distortion. Your clients are now free to transfer their Peps to funds investing anywhere around the world, enabling them to create an internationally balanced Pep portfolio for the very first time.
Of course, your clients may not want or need to internationally diversify their Pep holdings and we should not fall into the trap of transferring funds to overseas stocks just because we can.
The key to the new regulations, and for that matter the whole Pep transfer opportunity, is in giving clients the freedom to transfer their Peps to funds that specifically match their investment requirements, while still maintaining their tax-free status.
Many UK investors are simply not aware that they can do this. We receive countless investor calls at Newton querying whether they should transfer their Peps into Isas or, worse still, sell their Peps and buy a new Isa with the proceeds. Many investors may do this of their own accord, and so lose the benefits of an entire year's worth of tax-efficient allowance.
Investors need to be educated about how Pep transfers work. They need to know that, once they have completed a transfer application form with a new fund provider, the remaining administration is taken care of. The important factor for them to remember is that their investment's tax-efficient status will be maintained. If they are transferring a Pep, their investment will remain a Pep. If they are transferring an Isa, their investment will remain an Isa.
Since Peps were replaced by Isas in April 1999, investors have been transferring their existing Peps for a variety of reasons. These can range from wanting to consolidate their investments under one fund management roof, to reacting to a change in personal circumstances.
More often than not, investors are simply unhappy with the performance of their Pep and are seeking alternative fund managers who can boost their tax-free returns.
Choosing a new fund manager to manage your client's Peps can be difficult, particularly if they do not wish to repeat the process in a few years' time. We believe you should look for a fund manager who has a wide range of consistency strong funds. This will give you a good opportunity to diversify your client's portfolio, and means they can easily switch funds as and when their circumstances change.
If, for example, your client is approaching retirement, you may wish to move them to a fund provider who has both lower-risk growth funds and a good range of income funds.
Fund supermarkets can be particularly useful in this area, because they usually allow investors (or their advisers) to switch funds and fund providers simply and cheaply.
Another development arising from the relaxation of the Pep regulations is that there is no longer a distinction between single company Peps and general Peps. This is good news for those investors who took out a single company Pep to make use of the tax-free allowance, but were never comfortable with the risk of one company stock.
These clients now have an opportunity to transfer their holding into the Pep fund of their choice, enabling them to either reduce the associated risk of their Pep, or to broaden its investment potential.
Another important plus point for investors is the consolidation element. If your clients have been diligently using their allowance since Peps were first formed in the late 1980s, they could find themselves with a considerable number of Pep providers, particularly if both husband and wife have invested.
Given that many Peps are made up of more than one fund, you and your clients could end up receiving a huge number of periodic statements. This is not simply annoying, it can be extremely difficult to keep track of such a myriad of information.
However, there could be an end in sight. As more fund managers move towards client-centric administration systems, Pep consolidation may soon result in refreshingly simple half-yearly statement runs.
Before transferring, you and your clients will need to look carefully into the terms and conditions of their existing Pep to ensure they will not be liable for exit fees or withdrawal penalties. If they are, they will need to consider whether the potential gains of moving their Pep to a new provider outweighs the costs of the transfer.
Newton, along with many other providers, does not charge exit fees. The only costs the client will have to consider is the potential initial charge of the new investment. This should be seen as an additional cost because it would not be incurred if the investor remained in their existing Pep fund. You should also look for any less transparent charges.
If, for example, one of the reasons your client wants to transfer is to gain access to a wide range of funds, they'll want to be sure the provider offers reasonable switching terms.
Higher charges will not always put investors off if they believe the new Pep fund is more likely to produce the returns they're expecting. However, as with all investment decisions, it pays to be aware of these in advance so that you and your clients can make an informed choice.
Pep regulations introduced last year allowed investors to create an internationally balanced Pep portfolio for the first time.
If people are transferring a Pep, it will remain a Pep in terms of tax-efficient status.
Many providers do not charge exit fees on Pep transfers.
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