Profits come to those who wait

The volatile state of the stock market, with share prices fluctuating widely on a daily basis, has given the marketing departments of PEP management groups a worrying time. If the government keeps to its plan to replace them with Individual Savings Accounts, personal equity plans have a short shelf-life.

Today, the vast bulk of unit trust sales, in particular, are made with PEP wrappers. Yet the promised sales bonanza shows no signs of happening. On the one hand, investors appear to have adopted a wait-and-see attitude. With the 20-per-cent fall in the stock market over the past couple of months, they are obviously concerned at buying a PEP at the wrong time.

Meanwhile, they are also waiting to see just what the ISAs will look like. To date, we are still waiting for the government to unveil the fine print. Until it does, PEP managers cannot say what their ISA offerings will look like. While most will simply swap an ISA wrapper for their existing PEP wrappers, they will not always be able to set up their computer systems to cope with the changes - as it is they are also having to sort out their programs for dealing with the "millennium bug". Already a number of groups have said that they are unlikely to handle the cash or life assurance elements of an ISA.

PEPs have proven themselves to be one of the most popular tax-free investments since their introduction in 1987, attracting almost pounds 80bn. Now, with just over six months to go, should you still buy them?

"Anyone thinking of making a long-term investment of five or more years should still consider PEPs" says Roddy Kohn of Kohn Cougar, a Bristol- based independent financial adviser (IFA). "They still provide a worthwhile means of sheltering capital gains and dividend income free of all tax. However, you must look at the product - not just buy a PEP because of the tax wrapper. Be wary of falling for marketing hype and buying any old PEP. You must choose very carefully."

This is wise advice. Don't buy a PEP just because it is tax-free and the manager is offering a one or two per cent discount on initial charges. Buy because you want a long-term investment and a PEP is a handy way of doing this. Remember the familiar investment principles: make sure the fund you choose suits your aims, look at past performance which, though not a forecast of the future, will tell you how the fund has done. And also look at the consistency of this performance.

Try to pick one that is always near the top of its sector. Look at charges.

If you are considering a lump-sum investment, while timing is important, try not to worry too much about it. To Graham Bates, a Leeds-based IFA, PEPs are for the long- term. "I purchased a PEP invested in Hendersons' European growth fund in July when markets were at their peak. But I'm not too bothered with the recent falls, although I wished I had bought it now. I'm taking a 10-year view, expecting strong growth in mainland European shares," he says.

Although markets have risen over almost every five- year period since the Second World War, there are no guarantees that they will continue to do so. At present they are very unsettled.

"As no one knows when they will calm down, nor at what level, the cautious investor could consider one of the PEPs that offers capital protection, such as that from HSBC which will pay back all your original investment after five-and-a-half years if the markets have fallen," says Mr Kohn.

"If you are prepared to take a higher risk, you could consider that now is a reasonable buying opportunity. After all it was only three years ago that the FTSE 100 index was around the 3,035 and pundits were saying it was due for a fall. Well, we all know what has happened since then." If you have a PEP that you pay monthly or regular instalments into, continue doing so. By buying a PEP through regular savings, you are ironing out the ups and downs in the market.

If you need help or advice in selecting the right PEP, use an independent financial adviser. If you are happy making your own decision, rather than buy direct from the management group, why not use a discount broker? This way you will save on initial charges, maybe as much as pounds 180 or more.

When you have bought, all you need do is keep your nerve. Sell only when you are ready to - rather than panic because the market is falling. Ignore daily share price movements and remember in five or 10 years, if past performance is any guide at all, you should be more than happy with your profit.

Ten Pep Rules

1. PEPs are only suitable for tax payers

2. A PEP is a tax wrapper for investing in shares

3. Only invest in a PEP because you believe equities will grow faster over the long-term than other savings

4. Do not invest just because of the tax advantages

5. You may only have one PEP manager this fiscal year

6. Up to pounds 6,000 can be invested in a general PEP and pounds 3,000 in a single- company PEP

7. A husband and wife each have their own individual PEP allowance so before the end of this tax year a couple can invest up to pounds 18,000 in PEPs

8. Unless you are an experienced investor, use a PEP that invests in unit or investment trusts

9. A PEP is often cheaper than investing directly in a unit trust and you get all the income and growth tax-free

10. Look at past performance and charges as well as being sure that the PEP meets your investment aims