The Rise of Unit-Trust Peps: A Tax-Efficient Route to Equities

The unit-trust personal equity plan (Pep) has become the most popular way for inexperienced investors to enter the world of equities, with over £2.8 billion of retail unit-trust sales in the first half of this year alone. This growth can be attributed to the flexibility and tax benefits offered by Peps, which allow investors to shelter their investments from capital gains tax. By the end of the last tax year, there were 1.2 million general Pep holders in the UK, with the annual £6,000 Pep allowance allowing investors to invest as a lump sum or through monthly savings.

Key Takeaways:

• The Pep's tax exemption has underpinned its huge success, with all growth in Peps being free from capital gains tax.
• The annual £6,000 Pep allowance can be invested as a lump sum or through monthly savings, making Peps ideal for long-term savings objectives.
• The tax benefits of Peps are appreciated more in the short term by income seekers, as the payout can be collected tax-free.
• The main problem for investors lies in choosing the shares or unit trusts to put into the Pep, with the requirement being at least 51% of assets in European equities.
• Several financial advisers now offer impressive savings by refunding all or part of their commission, which is paid from the Pep's initial charge.

Statistics:

• Over £2.8 billion of retail unit-trust sales in the first half of this year alone.
• 1.2 million general Pep holders in the UK by the end of the last tax year.
• £6,000 annual Pep allowance.
• 3% up-front and 1%-2.5% annual charges for Fidelity's Money Builder Pep.
• 2%-4% discount on initial charges promised by some financial advisers, such as Chelsea Financial Services.

Sources:

• "The Sunday Times", 1994.
• Chase de Vere's Pep Guide.
• Ros Barder, editor of Chase de Vere's Pep Guide.
• Fidelity's Money Builder Pep.
• James Capel's Footsie Fund Pep.
• Schroder UK Enterprise Pep.
• Chelsea Financial Services.
• John Charcol Financial Services.