Personal Equity Plans: Cut the costs when you buy

AS MANY as one in five of us now buys PEPs and other financial products direct. This means answering an advertisement or making a telephone call as a first step to making an investment.

Behind this lies a revolution in consumer attitudes. "People now know at least the general characteristics of a PEP," explains Anthony Yagdaroff, of PEP broker Allen Direct, "and do not feel the need to pay high commission fees for a face-to-face meeting with an adviser."

PEPs will be superseded by the new Individual Savings Account from 5 April, and a boom in their sales is expected in the run-up to this deadline.

If buying through an independent financial adviser (IFA) or a company representative, expect commission to be deducted as an up-front charge from the value of your investment. Most PEPs earn the advisers selling them commission of at least 3 per cent of the amount invested - up to pounds 180 for the maximum pounds 6,000 allowance.

Should you be tempted to buy direct and cut these costs, this can be done from several different sources - notably a product provider. Some of these offer only a limited product range through their own direct sales operations. For instance Virgin Direct offers only two PEPs - a UK Tracker growth fund and bond and gilt income fund.

Neither of these carries any initial charges, and both have low respective annual management charges of just 1 and 0.7 per cent. Direct Line is also competing in this sector of the market, with a FTSE 100 Tracker PEP, again with no initial charge and with an annual management charge of 1 per cent.

Elsewhere, Midland Bank runs Midland Direct, marketing its Household Names PEP to existing customers, again with no initial charge and an annual management charge of 1 per cent.

The drawback of these providers is that they do not offer much in the way of independent financial advice when you buy one of their PEPs. In particular, they are under no obligation to recommend plans from other providers that might suit you better.

This means that caution is needed before you decide to buy from them. The products they offer have low charges, but also offer a very limited choice of funds. UK tracker funds are the most common in this category because they are uniquely suited to being sold without an initial charge.

Other discounted fund types - particularly those investing into corporate bonds, and gilts, involve real risk to capital and require active management.

Corporate Bond PEPs are also on offer without an initial charge, and are frequently sold direct by providers such as Fidelity. These funds hold only bonds issued by large companies, again with possible risk to both income and capital.

Providers such as Perpetual and Fidelity, which offer far wider ranges of PEP funds, have been reluctant to enter the direct market because they rely so heavily on other channels to sell their products - particularly IFAs.

One way round this is for providers to offer discounts on any initial charge both on PEPs bought direct and through IFAs; this can cut charges to 2 or 3 per cent. Either way, you pay the same for your plan.

To reduce initial charges further, you can buy from discount brokers who reinvest or rebate some or all their initial commission, living off so-called "trail commission" of 0.5 to 1 per cent of the PEP's fund value thereafter.

Shop around, and this approach can help you buy a managed PEP with no initial charge.

Most discount brokers offer general guidance on the past performance of PEPs and risk-reward ratings of underlying type of investments they hold.

Product providers include: Direct Line, 0845 3000233; Midland Direct, 0345 456123; Virgin Direct 0345 900900. Discount brokers include: Allen Direct, 0800 339999; PEP Direct, 0800 413186; PEP Shop, 0115-982 5105.