Changes to Pep regulations in April 2001 opened the gates for the Pep transfer market, which is now worth some £90bn in the UK and has meant substantial new business for advisers.
With some estimates valuing the Pep transfer market at £90bn and the removal of transfer restrictions in April 2001, the opportunities for advisers could be significant.
With the Isa season now nearing its conclusion, the past few months have seen the media dedicating pages to Isa-picking, fund experts giving their top tips and websites ominously counting down to the tax year end. But while intermediaries are stuck in the myopia of Isa fever, there is a potentially much greater opportunity relating to Nigel Lawson's great gift to the British public, the personal equity plan (Pep).
The changes in Pep regulation, which took effect from 6 April 2001, were made to bring the regulations associated with Pep schemes and their operation closer to the Isa schemes. This has facilitated the use of Pep transfers, which move funds from existing Peps into Isa funds.
The disappearance of the distinction between general Peps and single company Peps is one of the most significant changes. As a result of this change, the 25% non-qualifying investment and the 42-day rules no longer apply and an investor holding separate ex-general Peps and ex-single company Peps with the same manager can transfer them from one to another and hold them as a single Pep.
Expansion of the range of investments that can be held in a Pep has increased their flexibility and means a Pep can hold the same investments as the stocks and shares component of an Isa. As a result of changes in regulations, there is also now the ability to transfer part of a Pep. This means that investors can transfer part (or all) of their plan to another Pep manager, within an agreed time frame.
Some of the other but less significant changes include reduction in time limits within Pep transfers, which has been reduced from 60 to 30 days. Additionally, a Pep manager ceasing to act now has to give at least 30 days' notice to the Board and the investors.
Because of the previous Pep regulations, the majority of plans are heavily concentrated into the UK market. These new changes will enable Peps to be much more globally based and diversified. Equally, this will allow investors access to new economies and markets. These changes have significantly increased the flexibility and reduced regulation complications and time delays within Pep operations. However, in addition to opportunities associated with the regulation changes, there are several other factors that create opportunities for Pep transfers:
l Unsatisfactory performance of existing fund managers: it is past performance that influences the vast majority of investors when selecting an investment. Most investors would not want to invest or keep the investment in a fund that has consistently poor performance and this is one of the most important reasons for transfers of investments.
l Change in investor's risk profile: every investor is likely to change his or her attitude towards risk several times over time and the new flexibility within Pep operations gives investors the opportunity to move into higher or lower risk areas without severe charges and penalties or loss of tax-efficient status.
l Requirements of income rather than growth (or vice versa): investors' circumstances can also change and due to new rules, existing Peps in growth funds can easily be transferred either into different income funds or fund managers, depending on investors' preferences.
l Diversifying into world markets: most investors, be they experienced or not, prefer a degree of diversification and, as a result of new rules, this is now viable. It is possible to have Peps containing investments in several global sectors with different investment strategies and risk profiles.
l Spread of investments over several new fund managers: the ability to partially transfer existing Peps is a very good option, especially for sophisticated and experienced investors.
l Investors becoming more technically aware and sophisticated: as performance is the key to investment success, it follows that continuous monitoring of the investment is required. The ability to have up-to-date information is vital and many investors periodically check the performance of their investments. New technology used by some Pep managers allows investors to review their investments on a daily basis, rather than the more usual monthly or quarterly statements.
Indeed, technology looks likely to enhance the Pep opportunity with the advent of online transfers. This has been made much easier by the ability to move between different managers funds' within each supermarket's Pep wrapper. Although these are currently offered by a limited number of supermarkets, such as Cofunds, Egg Invest, Jarvis Fund Management and FundsNetwork, they can offer very competitive transfer rates.
Additionally, the liberalisation of Pep investment rules means investors can deal their shares online and move them into a self-select Pep. This allows investors to create a bespoke portfolio within the Pep wrapper, which are offered by online stockbrokers such as E*trade, Charles Schwab, Fastrade and American Express Sharepeople. Providers such as E*trade allow investors to invest in US and European shares traded on the London Stock Exchange's International Retail Service Platform, facilitating greater global diversification.
It is the global aspect of Pep transfers that makes them a particularly enticing option for many investors. Under previous regulations, Pep transfers were allowed across the UK and European markets but not in other regions.
This has meant that investors have missed out on the opportunities provided by investing in the highly successful North American sector. Individuals who invested in North American funds 10 years ago have enjoyed much higher returns than those investing in the UK sector. That said, many international sectors have not performed as well as the UK, and investors may be exposing themselves to risk if they diversify into these markets.
Regardless of past performance indicators, there is no doubt the flexibility will aid effective diversification, especially for more experienced investors.
Transfer costs associated with Pep transfers are fairly standard across the market, with the exception of certain online products. These are usually in the region of 3% initial charge with 1% annual management charge. For more sophisticated and experienced investors, dealing directly with the Pep manager can lower some or all of the initial charge.
Most Pep managers now have the facility for investors to read the relevant material online and print the application form, which they then send directly to the manager (this is not to be confused with the total online transactions offered by some of the fund supermarkets). This process can also reduce the overall transfer time and administration. Most deals, direct or through advisers, usually take anything between one and four weeks depending on the existing manager, as well as the new manager.
While the focus is on new Isa opportunities, advisers would do well to consider the flexibility of investment options provided by the liberalised Pep transfers regulations created in April 2001. With the evolution of a client's risk profile and stock market volatility and uncertainty prevailing in the current environment, it is only right to review investment options and, if necessary, transfer into more attractive investment prospects.
Although Isas look set to steal the headlines this tax year, it may well be that the Pep transfers are more likely to benefit clients' wealth. And for that, if no other reason, they should be carefully considered.
The value of the Pep transfer market is estimated at £90bn.
Because of previous Pep regulations, the majority of plans are heavily concentrated in the UK market.
The liberalisation of Pep investment rules means investors can deal shares online and move them into a self-select Pep.
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