PEPs that protect you from being a fall guy

One Of the best-value PEPs is now available in a form that stands to lower the risks to investors who are worried that the stock market could be heading for a fall. Investors who want to use up their PEP allowance before the end of the tax year now have the option, with the Legal & General UK index-tracking PEP, to have that money drip-fed into the stock market over time - so avoiding the risk of investing everything just before a crash, and potentially benefiting from lower prices in the future.

Many City investors are cautious about the short-term outlook for the stock market and some, including Legal & General, believe a fall could occur.

The date for putting money into a PEP for this tax year is 5 April, at the latest. With most PEPs, money will be immediately exposed to the ups and downs of the stock market. But, if you wish, L&G will split this money into 12 portions and invest it monthly over the next year. In the meantime, uninvested cash is kept on deposit earning tax-free interest, cur- rently at the rate of 5.5 per cent.

Phased investment is available on seven different L&G PEPs, in each case at no extra charge. But it is a particularly welcome addition to the attractions of the company's index-tracker PEP.

This PEP, which aims to match the performance of the UK stock market, is already the cheapest PEP of its kind and is an excellent deal for anyone looking for a straightforward stock-market investment. The only charge is 0.5 per cent a year of the value of your investment. If it is bought through a discount company, such as Chelsea Financial Services, you can get a one-off commission rebate of 0.75 per cent of whatever you invest. L&G joins two other investment companies - Fidelity and Henderson Investors - giving the option of phased investment on end-of-tax-year PEP purchases.

Research by L&G shows that generally investors are better off investing all they can as early as they can, rather than phasing investment - since stock markets generally rise. But with the stock market at its present high, investors might well now benefit from phasing.

L&G, which correctly forecast the stock market's present high, predicts that the market will take a significant tumble before recovering some, but not all, of these losses by the end of the year. Should these forecasts prove correct, someone who bought straight into L&G's index-tracker PEP, rather than taking the phasing option, might be looking at losses of nearly 10 per cent. The minimum investment in the L&G UK index- tracker PEP is pounds 3,000. The phased investment money will be invested on the third Thursday of every month. If during the 12 months you believe the stock market has hit rock-bottom, or that you are losing out and want to be fully invested, you can bring forward all your monthly investments. You can also withdraw the cash before it is invested, although you must keep a minimum of pounds 1,000 in the PEP.

As well as the main pounds 6,000 PEP allowance, investors can put pounds 3,000 into a single-company PEP, the type that takes only one company's stocks and shares. There's more risk here than with all your money going into a range of investments through a PEP holding unit or investment trusts, and there's the bother of choosing a single share. But a number of investment companies have exploited loopholes in the PEP rules to launch lower-risk single-company PEPs.

Legal & General and HSBC (the parent company of Midland Bank) offer PEPs with returns linked to growth in the stock market and protection from any losses over a five-year period.

Legal & General's Election PEP offers 140 per cent of however much the stock market grows over five years, with two important caveats. This growth is calculated from the average level of the stock market this year, to the average level of the market in year five. If the stock market should fall this year, investors stand to benefit from this first-year averaging, although the effect of the final-year averaging could then be to dampen investors' overall performance.

The second caveat is that while the figure of 140 per cent of the market's growth might seem attractive, investors do not get any of the dividends they might normally expect from a stock-market investment. If, however, the stock market should fall over five years, L&G will return your original investment.

HSBC PEP Plus offers whatever percentage growth (again without dividends) the stock market achieves over five years, with a minimum total return of 20 per cent tax-free. So if you believe the stock market will rise more than 20 per cent over the next five years - a fairly unambitious target - the L&G Election PEP is the better bet.

Generally, investors prepared to invest in the stock market in the long term should be wary of such guaranteed investments, because the guarantees have a price in terms of reduced investment potential and restrictions on, for example, how easily you can get your money back.

But given that the use of a single-company PEP will otherwise probably mean the high risk of investing in a single trading company, such as BP or Shell, with the added risk of a potentially fragile stock market, anyone looking to make maximum use of the PEP allowances this year may prefer these options. Both guaranteed investments are available on a discounted basis from companies such as Chelsea Financial Services.

Contacts: Legal & General 0800 116622; Chelsea Financial Services 0171 351 6022; HSBC 0800 262115.

The 'Independent on Sunday' has a free 'Guide to PEPs', written by personal finance editor, Steve Lodge, and sponsored by GA Life, a PEP company. For a copy call 0500 125888 quoting reference 259/1, or complete the coupon.