The time is right to pick a PEP

YOU HAVE until midnight on 5 April 1999 to invest your 1998/99 allowance in a PEP. After that, no more new money can be accepted and PEPs will be replaced by individual savings accounts. Existing PEPs will continue with their tax advantages.

The main point is that a PEP is only a tax wrapper which invests in an investment portfolio; it is not an investment in itself.

This year, every investor can put up to pounds 9,000 in PEPs. Of this, pounds 6,000 can be put in a general PEP, which can invest in managed funds as well as direct holdings. A further pounds 3,000 can be put in a single-company PEP, which holds shares in just one company. All the returns you make are free of income tax and capital gains tax.

As hardly any investors in unit or investment trusts pay capital gains tax, the real savings come on the income front. Even after the halving of the advanced corporation tax rebate to 10 per cent next April, this is still a very worthwhile saving, especially for anyone who pays tax at 40p in the pound.

The general consensus among independent financial advisers (IFAs) is that provided you're prepared to invest for five years or more, now could be a good time to take out a PEP.

"No one knows what the stock market will do," says Ian Millward, of Chase de Vere. "Timing investment so that you buy at the very bottom and sell at the top is almost impossible. History shows us that, over the long term, equities nearly always outperform any other type of investment."

This is a view backed by IFA Roddy Kohn, of Kohn Cougar, who says: "In the future, we could all look back and see that this was a very good time indeed to be investing. There is much better value in the market than there was a few months ago, so I see now as being a reasonable buying opportunity. After all, in 1995, when the FT-SE 100 was only just over the 3,000 level, there were a lot of analysts forecasting a fall. Well, even today, it's still up some 70 per cent from that level."

Picking the right PEP is difficult. If you don't know what you want, how to work out your investment aims or the risks you are prepared to take, IFAs can help. They are usually paid by commission from the PEP manager - typically 3 per cent that comes out of the initial charges you pay to buy the PEP.

There is also plenty of free research available. Read the personal finance pages of newspapers, or any of the specialist investment magazines. Some IFAs produce PEP guides. Chase de Vere (0800 526092), for example, prepares a comprehensive annual guide costing pounds 12.95 a copy, refundable against any PEP purchased through the company.

Look at the fees levied by the fund. These usually consist of initial and annual charges, and sometimes an exit charge for PEPs cashed in during the first five years. Sometimes you'll find that buying a unit trust inside a PEP wrapper is cheaper than buying direct. Typical PEPs have initial charges under 4 per cent, compared with 5 per cent or more for a unit trust.

You should also look at past performance. While no one can foretell the future, track records will give you a guide to which managers have done well. Don't just look at one set of performance tables that will only give you a snapshot. Find out how managers have done over different periods and year on year so that you can see how consistent they are.

You can save on charges by using one of the many discount brokers that advertise in the newspapers. You have to make your own decision about which PEP to buy, but you'll save an average of pounds 180 on a pounds 6,000 investment. Brokers refund either in cash or extra units for your PEP. Don't worry about how they make their money; the PEP managers usually pay the discounters an annual 0.5 per cent renewal fee for each PEP sold.

The world is divided between those who think we are heading for further nasty falls on the market and those who feel we are near the bottom. Many IFAs are cautiously optimistic. "It's time to be selective," says Graham Bates, of Bates Investment Services. "Only look to funds that invest in the main stock markets and stick with the major groups that have a good range of top-performing funds."

The key is having a balanced portfolio. "If you are already heavily invested in the UK, look to European funds," advises Amanda Davidson, of Holden Meehan. "I particularly like the European funds of Fidelity, Gartmore and Invesco."

Risk-averse investors, or those seeking to maximise income, should look at corporate bonds (see page 20).

If you are unhappy with the way an existing PEP performs, don't worry. Even after ISAs come in, you will be able to transfer to a better-performing manager and keep the tax- free returns.