Personal Equity Plans: Time to switch?

If your PEP has been a bit of a dog, maybe you should move your funds. But study the options carefully

It may not be obvious to most PEP investors, but a second battle front in the war for our custom is opening up. This is not simply about where to place our last remaining pounds 6,000, but about where to transfer all our other PEP investments if we feel they are not performing well enough.

Fund managers know too well that there will be no more PEP money after 5 April. In addition to limbering up for the new Individual Saving Account (ISA), which comes on stream thereafter, they aim to take advantage of the fact that this last deadline is also likely to stimulate many of us into checking how well our investments have done so far.

It may be tempting to switch out of a poorly performing PEP before the April deadline. But you shouldn't rush into any precipitate decisions. While no new money will be allowed into PEPs, transfers between managers will still be allowed. It will, in fact, be the only PEP market in town.

Why should anyone consider a transfer? There can be any number of reasons. Over time, your investment aims may change. Younger investors are more likely to be looking for tax-free maximum capital growth, while older ones tend to be more keen to seek extra income to supplement a pension. As you near retirement age, you may want to transfer your PEP funds from higher to lower-risk investments.

Maybe you have a number of PEPs with different managers, having in the past allocated your annual allowance to different groups, and now want to consolidate them under one roof. Or you could be nervous about the direction share prices are heading. If so, and you have made substantial profits from existing PEPs, you may then want to park your existing profits in a low-risk home.

But one of the best reasons for transferring is because you have invested in a fund that has consistently been underperforming. Unfortunately, there are a large number of funds that fail to beat their benchmarks, let alone do better than their numerous rivals.

"After three years is a good time to assess performance - so many groups have changed ownership and many managers have moved on to other jobs in that time," says Jason Holland of BESt Investment Brokers, who specialise in PEP and unit trust investment.

"While some managers have forecast the market correctly, quite a few have consistently got it wrong," says Mr Holland. And unless there is a convincing argument otherwise, these are the funds you should seriously consider moving.

His company regularly reviews PEP funds and has found that while there are a number a top performers, there are many dogs, funds that always seem to underperform. It defines a dog as one that consistently not only fails to beat its benchmark index, but also fails it by 10 per cent or more. BESt Investment has produced a review of these dogs, available to readers who contact the company.

"Investors should periodically review their PEPs" says Graham Bates of Best Investment Services. "There is no reason to leave your money in funds that consistently underperform. So many investors buy a PEP that they then shove away in a drawer. The periodic statements and valuations they receive will tell them that the performance reflects the market, but this does not necessarily mean that the fund has been doing well. In fact, it could be doing rather badly compared with its competitors in the sector."

As many investors fail to do these reviews, Graham Bates is offering help with this, in return for giving his firm the renewal commission paid to advisers by PEP managers.

To help you decide, the table shows the average performance of fully qualifying funds in the most popular sectors. If your PEP investment shows substantially poorer returns, you many wish to consider making a transfer.

If you do want to move your existing PEP investment vehicle within the same group, to a low-risk investment or from a poor performer to a better one, all that is often needed is a quick phone call followed by confirmation of the transfer in writing. This can often be done free of charge or at a low cost and takes very little time.

If you want to transfer part of a PEP holding to another manager you face a major problem. Most groups, apart from Fidelity, bundle your PEPs together. This means that they have no way to separate each year's PEP investment.

Of the main management groups only Fidelity allocates each year's allowance into a discrete PEP. So apart from this group, you cannot do a partial transfer. You are faced with an all or nothing decision.

If you decide to go ahead, you will need to ask the new manager for the necessary forms, fill them in, and then wait for the transfer to happen. "This can take some time, anything up to month, when you will be out of the market," warns Mr Holland. Also watch out as a large number of PEP managers will make a charge for transfers.

"Further, there is no guarantee that the new fund will give an improved performance," says Graham Bates. "And if there is a 5 per cent initial charge with the new fund, it will have to do that much better."

"If you transfer to a group that is offering a discount on its charges at the time, you should get at least as good a deal or better," says Paul Penny of Financial Discounts Direct, one of a large number of execution- only brokers who offer discounts to PEP investors. "So you may find that the initial charge can be substantially reduced."