PEPs bring power to the people

Just pounds 20 a month can produce a big sum, writes Emma Weiss; In some cases, a unit trust that is wrapped in a PEP can have a lower initial cost than the unit trust itself

THE obvious advantage of regular savings plans offered by companies running unit trusts, investment trusts, and PEPs is that they allow investors to enjoy the benefits of stock market returns without needing thousands of pounds to begin with.

The introduction of PEPs in 1987 has helped to highlight the value of regular saving to the smaller investor. PEPs allow tax-free investment in a qualifying unit or investment trust of up to pounds 6,000 every year. Taking advantage of this in a regular savings plan is probably the most tax-efficient way of saving after a pension.

In the second quarter of 1995, 162 unit trust companies sold pounds 95m of unit trusts or PEPs through regular savings plans, according to figures from Autif, the industry trade body. There are now hundreds of thousands of people saving this way every month. And many unit trust companies report continuing growth.

Investment is not the domain solely of the ultra-rich, something that "other people" do. In fact, saving is all the more important for the smaller investor in making available money stretch further. Anyone who can afford pounds 10 on the National Lottery every week can just as well afford a unit or investment trust savings plan - monthly savings can start from as little as pounds 20.

Compared with the Lottery, returns from a stock market savings plan are much more predictable and can build up from small amounts into surprisingly large sums of money.

Of course, investing in the stock market is still risky. As the market rises and falls in response to economic and political conditions, it is investors' capital that goes with it. But over the longer term, the value of stock market investments has provided a return well above inflation and that from building societies. Over the past five years, the FT-SE 100 has risen by more than 70 per cent.

Investing via unit or investment trust regular savings schemes can actually take out some of the risk. Having chosen a fund, investors are taking a stake in a widely spread portfolio where the investments are chosen and analysed by a full-time professional investment manager.

One of the hardest decisions is when to commit money to the market. Fund managers are expected to have a feel about which way markets and investments are heading. But for the investor, savings plans get round this question of timing.

Schemes work by feeding money into the investment fund regularly (normally monthly) and in small amounts. This avoids the problem of investing all your money at the wrong time - just before a crash - and offers the benefit of pound- cost averaging, which is explained in more detail in the accompanying story.

Savings schemes themselves go back 40 years. M&G introduced the first unit trust savings scheme in 1954, describing it then as a "thrift plan".

The first investment trust savings scheme was set up in 1984 by Foreign & Colonial - and as many as 25 per cent of the investors in this trust are now regular savers. Altogether, investors can now set up a regular savings plan for more than 700 available unit trusts.

The real beauty of the savings schemes is that the amounts put away each month are relatively small, so the sacrifice is that much less hard to bear. The monthly amounts can be as little as pounds 20.

A pounds 20-a-month regular saving in the average income-oriented UK equity unit trust over the past 15 years would by now have produced a nest-egg of more than pounds 12,000. The building society would have produced less than pounds 4,500. The potential differential would be even greater if the unit trust was held within a PEP, accumulating tax-free.

A regular savings plan ideally forms part of an overall financial plan. The most effective way to save can often be with a specific future financial commitment in mind. School fees, a wedding, or the holiday of a lifetime are some of the possibilities.

This requires a clear focus on the performance and required timescale of the investment.

Regular savings plans cover the spectrum of unit trusts. All investment options are open to the smaller investor just as they are for a lump-sum investor - the ability to invest in a particular country or a particular type of company, or simply choosing a unit trust that is designed to maximise either income or growth prospects. The regular saver is not discriminated against.

The same is true of cost. Even though regular savings schemes are more costly for the companies themselves to run, in the vast majority of cases this extra cost is not passed on to the saver. A unit trust bought through a regular savings scheme is no more expensive than for an investor who puts in a lump sum of thousands of pounds.

In addition, investing via a PEP can be even cheaper. In some cases, a unit trust wrapped in a PEP may have a lower initial cost than the unit trust itself.

Regular savings plans have the added advantage of flexibility. Putting aside a certain amount of money every month is undoubtedly a good habit to get into, and paying by monthly direct debit or standing order can take away the effort altogether. But once an investor has accumulated the minimum lump sum required by the unit trust company, payments can be stopped - temporarily or permanently - without penalty to the investor.

And although stock market investments should be held for at least five years to reap the real benefits, and ideally much longer, a unit trust is not in itself a fixed-term investment with penalties and advance warnings needed for early encashment.