Time is running out for PEP decisions

Managers of personal equity plans (PEPs) are apprehensive that poor stock market performance over the past year has dented investor confidence. Some doubt they will pull in anything like the money that poured in this time last year after the boom ing stock market of 1993.

Juicy yields and low or no charges are being offered as bait. However, with an encouraging outlook for the UK economy and stock market - the fund manager Schroder is forecasting dividend growth of 6 per cent this year - investors should look beyond the come-ons to past and likely future performance.

Those who have not yet used their allowance have only a few weeks to make their choice before the end of the financial year. Tax-free capital gains and income from an investment of up to £9,000 per person per year - £6,000 in a general PEP and £3,000 in a single company PEP - are generous incentives. However, most unit trust and investment trust PEP managers will take less, some as little as an annual £500 lump sum or £50 a month in a savings scheme.

In the past two years, high-income PEPs, some offering yields of 10 per cent, have lured building society investors away from safe but low-yielding accounts.

Next on the agenda, although not until next financial year, are corporate bond PEPs. They will be able to invest in fixed-interest issues from UK companies, including preference shares, corporate bonds and convertibles. Estimated gross yields range upwards from 8 per cent.

Even with interest rates ticking up, the 42nd issue of National Savings is offering just 5.85 per cent a year tax-free for five years, and building society Tessas pay around 6.8 per cent for the full amount invested.

So what should investors wanting income do?

The answer depends largely on how desperate the investor is for income now rather than for future income and capital growth and how he or she views risk. Yields well above the stock market average - presently 4 per cent - spell the danger of missed capital gain in good times and capital erosion in bad.

Hypo Foreign & Colonial's Higher Income Plan pulled in over £500m in the year after launch in February 1993. It was the first unit trust PEP aiming for a high but not guaranteed yield of 10 per cent, by using financial derivatives, high-yielding bonds and encashment of capital. In its first year it was criticised for losing out on capital growth in a buoyant market. In the past year the units' price has dropped and is now 13 per cent below the 25p launch. The yield was cut in March to 9 per cent.

Craig Walton, marketing director of Hypo F&C, maintains investors needing high and immediate income were prepared to forgo capital gain in the good times and have benefited from the fund's defensive qualities in a falling stock market.

The risk/reward equation is clearly demonstrated by John Govett's Monthly Income PEP. The yield on the 50p launch price has been cut from 10 to 8 per cent and the capital value of units has dropped 24 per cent. However, for new investors the yield is above 10 per cent.

At the other end of the income spectrum are plain vanilla equity income unit trust-PEPs. Next month Schroder launches its Income Builder PEP, aiming for income above inflation and capital growth. The estimated starting yield is 4.5 per cent after charges.

Schroder says investors putting £6,000 in its existing income unit trust in June 1979 would have received £12,000 net income over 15 years against £7,500 from a fixed-income investment yielding 10 per cent.

Peter Edwards, of Premier Unit Trust Brokers in Bristol, recommends lower-yielding investments with capital growth potential. Even if the dividends are inadequate the capital growth will allow investors to cash in units to meet extra costs.

Points for investors Opportunities in income PEPs are multiplying as new products for investors emerge in this area.

Investors waiting for corporate bond PEPs should be aware these products can be just as volatile in their movements as equities.

Investors should consider the following points when choosing an income PEP from the range on offer: Will the yield rise over the year or stay the same or fall?

What are prospects in the PEP for capital gain or erosion?

Is the estimated yield quoted worked out before or after PEP charges, and is it calculated on the launch price or the existing price of units?

Are PEP charges taken out of capital, so that units have to be sold to pay them, or out of income?

How often is the payout - monthly, quarterly or half-yearly?

BEST DEPOSIT RATES INSTANT ACCESS Telephone Account Notice Deposit Rate Interest or term % interval

Yorkshire BS 0800 378838 First Class Access Postal £1,000 5.95 Year Skipton BS 01756 700511 3 High Street Instant £2,000 6.10 Year Britannia BS 01538 391741 Capital Trust Postal £10,000 6.35 Year Northern Rock BS 0500 505000 Go Direct Instant £20,000 6.90 Year NOTICE ACCOUNTS AND BONDS Bradford & Bingley BS 0345 248248 Direct Notice 30 Day (P) £1,000 6.40 Year Sun Banking Corporation 01438 744500 Liquidity60 day 60 Day £100 6.50 Year Northern Rock BS 0500 505000 Postal 60 60 Day (P) £50,000 7.40 Year Halifax BS 01422 333333 Special Reserve 1 Yr Bond £10,000 7.35 Maturity MONTHLY INTEREST Britannia BS 01538 391741 Capital Trust Postal £2,000 5.70 Month Bradford & Bingley BS 0345 248248 Direct Notice 30 Day (P) £10,000 6.70 Month Northern Rock BS 0500 505000 Postal 60 60 Day (P) £10,000 6.79 Month£50,000 7.16 Month TESSAS (tax-exempt special savings accounts)

Britannia BS 0800 269655 5 Year £8,200 9.25 fixed Year Hinckley & Rugby BS 01455 251234 5 Year £3,000 7.50 Year Homesdale BS 01737 245716 5 Year £1 7.40 Year Tipton & Cosely BS 0121 557 2551 5 Year £1 7.35 Year FIXED-RATE BONDS Halifax BS 01422 333333 G'teed Reserve 2 Yr Bond £2,000 8.10 fixed Year Britannia BS 0800 269655 3 Year Fixed 3 Yr Bond £2,000 8.75 fixed Year Co-operative Bank 0800 125100 Fxd Rate Bnd 3 Yr Bond £2,000 9.25 fixed Maturity Sun Banking Corporation 01438 744500 Invstmnt Certs 5 Yr Bond £1,000 9.00 fixed Year HIGH-INTEREST CHEQUE ACCOUNTS Woolwich BS 0800 400900 Current Instant £500 3.70 Year Alliance & Leicester BS 01162 717272 Alliance Instant £5,000 5.00 Month Chelsea BS 0800 717515 Classic Postal Instant £2,500 6.00 Year £25,000 6.35 Year OFFSHORE (gross)

Portman Channel Islands 01481 822747 Instant Gold Instant £5,000 6.20 Year Derbyshire (IOM) 01624 663432 Instant Access Instant £10,000 6.30 Year Sun Banking Corp (Jersey) 01534 608060 Flexible Inv 60 Day £25,000 7.006 months Britannia International 01624 628512 3 Year Fixed 3 Yr Bond £2,000 8.75 fixed Year

NATIONAL SAVINGS Accounts & bonds (gross) Notice or term Deposit Rate % Interest interval INVESTMENT ACCOUNTS 1 Month £20 5.25 Year £500 5.75 Year £25,000 6.00 Year

INCOME BONDS 3 Month £2,000 6.50 Month £25,000 6.75 Month

CAPITAL BONDS (Series I) 5 Year £100 7.75 fixed Maturity FIRST OPTION BONDS 12 Month £1,000 6.40 fixed Year £20,000 6.80fixed Year

PENSIONERS GUARANTEED INCOME BOND (Series 2)

5 Year £500 7.50%F Month

NS Certificates (tax free)

42nd ISSUE 5 Year £100 5.85 fixed Maturity 8th INDEX-LINKED 5 Year £100 3.00+RPI Maturity CHILDRENS BOND (Issue G) 5 Year £25 7.85 fixed Maturity BEST BORROWING RATES MORTGAGES Fixed rates Telephone Rate/period Max Fee Incentive % advance % £

Hinkley & Rugby BS 01455 251234 1.50 to 1/11/95 60 £195 - Yorkshire BS 01274 740740 4.89 to 1/4/96 95 £250 - Greenwich BS 0181 8588212 7.75 to 1/3/98 95 £275 - Cheltenham & Gloucester BS 0800 272131 8.99 for 5 years 90 £250 No IGP, val free, fee refunded Lambeth BS 0171 737 2925 9.14 to 1/3/00 95 £250 - TSB Local branch 9.49 to 31/10/04 95 £250 Free valuation

Variable rates Northern Rock BS 01179 294844 2.49 to 1/3/96 90 £250 £400 cashback Bank of Ireland 01734 510100 5.10 to 1/2/97 90 £260 - Bradford & Bingley BS 01274 555462 6.50 for 3 years 75 - £300 FTB cashback Nationwide BS 01793 315315 7.14 for 7 years 95 £299 Up to £450 cashback

PERSONAL LOANS Unsecured Telephone APR Fixed monthly payments on £3,000 for 3 years % With insurance Without insurance Midland Bank Local branch 15.40 £116.54 £103.14

Abbey National Local branch 15.90 £115.81 103.77

Clydesdale Bank 0141 248 7070 16.20 £113.94 £103.33

Secured Max advance % Max term Barclays Bank Local branch 9.90 80 5 to 25 years Royal Bank of Scotland 0131 556 8555 10.70 70 3 years to retirement Midland Bank Local branch 11.30 90 5 to 30 years

OVERDRAFTS Telephone Authorised Unauthorised EAR % EAR % Woolwich BS 0800 400900 9.50 29.50

Alliance & Leicester BS 0500 959595 9.50 29.80

CREDIT CARDS Telephone Card name Minimum Rate APR Annual income pm % % fee Standard Robert Fleming (S&P) 0800 282101 Mastercard/Visa 1.00 14.60 £12

Royal Bank of Scotland 0131 556 8555 Mastercard 1.25 16.00 - MBNA International 0800 062620 Mastercard/Visa 1.38 17.90 -

Gold cards LLoyds Local branch Mastercard £20,000 1.00 14.50 £40

Midland Local branch Mastercard £20,000 1.30 18.10 £35

MBNA International 0800 062620 Mastercard/Visa £20,000 1.38 17.90 -

STORE CARDS Payment by direct debit Other methods Telephone pm APR pm APR John Lewis Local store - - 1.39 18.00

Marks and Spencer 01244 681681 1.70 22.40 1.84 24.40

Timecard 01132 471471 1.70 22.40 1.87 24.90

APR=Annualised percentage rate. EAR=efective annual rate. All rates are subject to change without notice Source: London & Country. Freephone 0800 373300 Compiled on 27 January 1995

P= by post only. All rates are shown gross and are subject to change without notice.

Source: Moneyfacts Monthly Guide to Investment and Mortgage Rates. Compiled on 26 January 1995