We have all read the estimates of just how big the ring-fenced Pep market is. Recent ones vary from ...
We have all read the estimates of just how big the ring-fenced Pep market is. Recent ones vary from £50bn to £80 Bn. One thing is for sure, whichever is more accurate, the market is enormous. IFAs and their clients can make the very most of their Peps which have evolved from very basic building block investments, to highly customised plans which now cater, in many cases, for substantial tax free portfolios.
While the launch of Isas was set against a backdrop of controversy regarding their complicated structure and rules, Peps are also far from straightforward. The differences between general and single company Peps and what counts as qualifying, non-qualifying or funds which are completely disallowed are not generally well known among the investing public.
The Pep market grew to become the most successful and dominant retail sales route for the fund management industry to sell funds throughout the 1990s and because of differences between the Pep and Isa rules, Peps continue to be dealt with separately from Isas.
So what choices are available to Pep investors? Well, as the Pep investment limits went up and the rules widened to allow some international investment exposure, some Pep plans evolved beyond the basic offering of a UK fund investment through a tax-free wrapper.
There are a number of different structures available but the most popular will offer arguably, the two most important features to IFAs and their clients.
l Investment performance, both in terms of total return and investment choice available.
l Plan flexibility: To offer both a choice of funds and fund managers but also to offer flexibility at plan level, for example, flexible income options and the ability to change from a growth portfolio to one that can provide for a high and rising income in the future.
There are a number of different Pep transfer plans available and there is a distinction between three elements; 'investment structure', 'investment type' and 'plan structure'. By 'investment structure' I mean the mechanics of how the investment works (see below), 'investment type' i.e. type of investment offered within the plan, unit trust, Oeic, investment trust or direct equities/shares and 'plan structure', the facilities available at plan level.
Turning first to 'investment structure':
l Multi-manager: Plan wrappers offering a selection of fund managers and funds.
l Managed funds: Discretionary managed where holdings are held individually at client plan level.
l Fund of funds: The unit trust structure investing in a selection of unit trusts and held collectively at fund level.
l Fund Supermarkets: A choice of a given range of fund managers and (normally) their whole fund ranges on-line.
Some plan managers offer multi-manager choice with a selection of fund managers and a range of some of their funds. The fund managers and funds are selected on the basis of an investment vetting process to add value and aid the IFA and client.
However, the criteria used could miss out some new niche players or fund groups that have re-invented themselves by rebranding their marketing and adapting their investment process. Some of these niche and re-invented fund management groups are producing extremely good investment performance and frequently dominate the investment performance league tables.
Looking beyond the different investment structures we need to consider the 'plan structure'. The following is a checklist of what this might include:
Charges: Does the plan have an initial charge or no initial charge? Are there back end loaded penalties or transfer out charges?
Plan choice: Does this include the ability to take withdrawals, as well as regular and flexible income options?
Fund choice: Are the funds available in the plan from a single fund manager or does the manager offer a multi-manager range of funds? If multi-manager is offered, what type of investments can be held? Does it offer unit trusts, Oeics, investment trusts and direct equities/shares? Is there a good range of funds in terms of investment risk, covering the full spectrum from guaranteed, protected, risk averse, cautious, balanced, index tracking, aggressive to highly speculative funds? Is there a good selection of income and growth funds as lifestyles and financial objectives change?
This might all sound like an overwhelming choice but remember, if the plan manager also offers a good selection of managed funds and fund of funds, then it is possible to offer your client a well diversified portfolio using the multi-manager approach with relatively few funds. It is the overall choice both on initial transfer and for the future, which keeps your recommendations and client's options available.
Re-registration: One of the potential big downsides of recommending a Pep transfer can be the timing. If the transfer is in the form of cash from one plan manager to another, there will be 100% exposure to market movements as the cash is in the pipeline. A client could see hard earned investment gains evaporate purely as a result of investment timing and just plain bad luck.
However, there is a solution in the form of re-registration 'in-specie'. This is not the latest science fiction horror but rather a term for transferring existing holdings from one plan manager to another's nominee name without selling the holding. Although very few plan managers offer this facility within Pep transfer plans, more than 40% of all fund management groups are able to administer re-registration requests so there are very good opportunities for IFAs and their clients to use this facility if offered.
Cash option: A small number of Pep transfer plans allow cash to be held in addition to investments. While the rules
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