Your Money: Time to put pep into gilts

THE Government seems to have passed up a golden opportunity to boost its coffers - and offer investors a gentle way to feel their way back into the equity market.

It all revolves around the rules governing personal equity plans (Peps), which were designed to lure investors into buying shares with the promise of freedom from income tax on dividends and capital gains tax.

The line on share investment has been gradually softening towards collective investments. So now qualifying unit trusts and investment trusts can make up all of the pounds 6,000 regular Pep.

When the rules were changed to allow equal status to European shares, someone failed to notice that the boss regulator, the Securities and Investments Board (SIB), had changed the definition of 'qualifying trusts', so that the term encompassed gilt and bond unit trusts as well as purely equity-based ones. The only restriction was that half the qualifying portion had to be in shares.

So a Pep portfolio could be constructed that would have the pounds 1,500 allowance for non- qualifying trusts invested in gilts as well as half the remaining pounds 4,500 - making a total of pounds 3,750 in gilts - way over half the total.

Now the Revenue has taken legal advice and discovered the error - and changed the rules.

So from April, all trusts counting as non-qualifying must hold at least half their investments in shares. So gilt or bond funds will not do. This will bring down the overall limit on gilts to half the maximum Pep holding.

Save & Prosper had already launched a Pep Portfolio for tax-free income using the gilts loophole. It will now stop selling it and will also have to sell existing gilt unit trust holdings in Peps before April, or the Peps will lose their tax haven status.

Several unit trust providers are considering launching tailor-made unit trusts with a balance of gilts under the 50 per cent waterline to boost stability and income in Peps.

Currently, gilts are offering returns that compare well with net returns from building societies. A packaged Pep that offered a tax-free decent return and the prospects of capital growth would be quite attractive to those who have grown wary of the stock market and who need income.

The Government also needs to attract money into gilts to cover its growing debt. It seems perverse, to say the least, for the Government to be so keen to stick to its creaky view that Peps should be used to expand share ownership, when the interests of both parties would be served by allowing the slip-up to stand. The only redeeming feature is that in rejigging the rules, it has actually made a small concession and opened the door a crack.

BUT if the Government is not going to lean on the unit trust companies to boost gilt sales, how is it going to get the cash flowing in at something like pounds 1bn a week?

The retail market is not the mainstay of the gilt market, but surely every little bit helps.

National Savings currently runs the National Stock register of gilts, which allows the public to buy gilts over a post office counter and avoid dealing with a stockbroker.

The commission is a modest pounds 1 for deals under pounds 250. But on new issues, there is no commission.

National Savings has shown with other products that imaginative advertising, using the wacky Far Side cartoons, can work, especially when combined with allowing people to clip coupons and use the post - rather than join post office queues.

Given a bit of effort to explain how gilts work and zappier names than Exchequer Stock 1999, it could work for gilts, too.

SUNDAYS are not what they used to be now that shopping has taken over as a respectable leisure activity.

And it seems that even Christmas is not what it was. An awful lot of people have money in mind.

So along with the emergency services and medical staff, all sorts of banking people will be on duty.

FirstDirect, the telephone banking arm of the Midland, for instance, is expecting hundreds of people to call to check their balances - or (more likely) to check up that the telephones really are manned 365 days a year.

And the cash machines should be happily spewing out money, watched over by a team of computer specialists. Last year, nearly 34,000 cash- hungry cardholders withdrew pounds 1.37m from Link cash machines on Christmas Day.

It's a worrying trend. We should try to give money matters a rest sometimes.

Merry Christmas.