Pick 'n' mix portfolios

When personal equity plans first appeared, the objective was simple: to give Sid a perk. For those too young to recall the "tell Sid" campaign with which British Gas was privatised, the aim was to offer tax incentives to individuals investing in shares.

The idea was that people would buy shares through stockbrokers and hold them in PEPs, rather than directly, so escaping tax on the earnings.

In this way, reasoned the experts, the public, busy buying into privatisations such as British Airways, would support wider share ownership - and thus, as one commentator put it, "become increasingly engaged by capitalism".

Of course, it hasn't exactly turned out that way. As the rules have changed over the years to allow investors to put the full PEP allowance into managed funds, the original concept of a tax shelter for individual share stakes has been overshadowed by the billions pouring into the packaged investment products.

But for those who want to build their own portfolio, the self-select PEP still has strong attractions. The annual limits - broadly, no more than pounds 6,000 in a general PEP plus a further pounds 3,000 in a single company plan - still apply, and the tax benefits are the same, but the mechanics are slightly different from the packaged product.

You still need a PEP manager - a bank or broker who is authorised to collect and pay your earnings tax-free - and this has to be paid for.

There are not normally any set-up charges, but there are annual charges, and you have to pay dealing charges on each transaction.

Annual charges can range from less than pounds 50 to pounds 250, so it pays to look carefully, and there are also variations in dealing costs. The largest managers of self-select PEPs are Barclays, Lloyds and ShareLink, all of which offer special rates for share stakes being bought into a PEP.

Lloyds Bank's Choice PEP, for example, offers what's probably the cheapest share dealing service in the country at just half of 1 per cent - a third of normal commissions. But there are a couple of snags.

This special rate applies only to 150 of the most popular shares and your orders will be "bulked" with those of other customers, and dealt only on alternate Thursdays. So this service would not really be suitable for volatile shares, or at times of uncertainty in the markets generally.

If you want normal "best price" dealing for your PEP, Lloyds' standard rates are 1.5 per cent, with a minimum of pounds 18.50 and a maximum of pounds 75.

ShareLink charges a similar 1.5 per cent commission, but the minimum and maximum rates are pounds 20 and pounds 37.50 - and you can also use their PEP to subscribe to new issues for an extra charge of pounds 10.

Active investors should take the time to study the company's annual report and accounts - and might consider attending the annual meeting. ShareLink charges pounds 10 for these services and some operators charge more.

You can also use a self-select PEP to shelter existing share stakes - by having your broker sell them and then buy them back into the plan. The process is similar to the "bed and breakfast" share sales and repurchase deals used to crystallise capital gains, and so have become known as "bed and PEP" deals. But you need to think it through: will the costs outweigh the tax saving? Indeed, will the initial sale take you over the limits for capital gains tax?

An alternative way to "tidy up" small share stakes or unit trust holdings is to use a share exchange scheme in which a PEP manager sells your shares and invests the proceeds in a managed fund.