Personal Equity Plans: Charges matter, but so does performance

HOW MUCH do you want to pay for your PEP? By shopping around you can cut charges. The less of your money that goes on fees, the more you can invest.

On the other hand investments held in PEPs should be long-term and over time the effect of charges will be reduced.

The main factor when choosing a PEP should be the likely performance of your investment. But charges are important. AIB Govett, for instance, is offering a 1 per cent discount on lump sum investments into its UK Equity PEP. Others are offering similar or better deals and several PEP managers, such as Foreign & Colonial, are offering two PEPs for the price of one for those who take out an investment trust before the end of this tax year and then another in the 1998/99 tax year.

There are plenty of other similar offers, while many of the low-cost PEP managers are simply pointing out that they have no initial charge. Companies with tracker funds such as Legal & General, Virgin Direct and Fidelity have done away with the upfront charges in the last two years. Their strategy has been successful and they have attracted much of the new PEP business, especially as many other companies still make an initial charge up to 5 per cent.

The low-cost companies have also pared annual management charges to the bone. Virgin Direct and Fidelity charge just 0.7 per cent a year while Legal & General undercuts them both by charging 0.5 per cent. Most PEP managers make an annual charge of around 1.5 per cent.

The savings can be considerable by choosing a low-cost PEP. But is there a downside? Yes. The reason most companies can afford to slash charges is because they have cut back on fund management costs. They have done this by cutting out the fund management altogether and instead rely on setting up funds that replicate average market performance. How do they do this? They use tracker funds that buy all or a representative sample of the shares in an index such as the FT-SE 100.

Also check for exit charges. Some PEP managers made a show of cutting initial charges only to introduce exit charges. These penalise you if you take your money out of your investment. M&G, for instance, is guilty of charging 4.5 per cent if you cash your PEP in before the year is out, although the charges drop year by year. Legal & General is worse, as it charges 5 per cent. Others simply charge a lump sum. Henderson, for instance, charges pounds 20.

Another way to cut charges is to buy your PEP through a discount shop. Most offer a range of PEPs, including plans from well-known investment houses. The discount brokers earn their money by receiving commission from the PEP provider every time they sell one of its plans. In order to offer customers a discount, the brokers have been splitting the commission with customers, which in effect brings down the charges for customers.