A hands on approach

INVESTORS who fancy picking their own shares can do just that in the tax-free environment of a self-select PEP. As with managed PEPs, the maximum that can be put into the self-select is £6,000 a year. The difference is that instead of leaving all investment decisions to fund managers, the self select PEPs are designed for do-it-yourself investors.

As such, they are generally considered to be for the experienced investor. But you can opt for a plan run by a stockbroker or independent financial adviser who will advise on shares, unit trusts and investment trusts for your PEP plan.

Stockbroker Killick & Co has been offering its Portfolio PEP for several years. Matthew Orr, a partner in the firm, said: "The problem is that because the name "self-select" implies a degree of execution, people don't realise they can actually get advice on which investments to buy within the PEP. It also implies wheeling and dealing in individual shares, but in fact nearly half of our business is investment-trust-related."

He believes self-select PEPs are more flexible than general PEPs. "We believe every investor should have a self-select PEP," he said. "The one great advantage is the ability one has to hold cash. You can hold the entire PEP in cash for as long as you like, as long as it is for the specific purpose of investing in shares in the future.

"If you feel uncomfortable about the price of any of the shares you are holding, you can sell them straight away and hold the PEP in cash until you are ready to invest in something else. You have total control."

He recommends clients invest at least £2,000 per holding in individual shares or investment trusts. Charges on a self-select PEP are usually a lot cheaper than the familiar managed PEP. Killick & Co charges 1.65 per cent in commission when you invest in a share or investment trust, and then charges £7.50 for handling each dividend.

The self-select PEP market is dominated by banks and stock broking firms but a few fund management companies also run them. Save & Prosper offers one called the Dealing Plan, for investors who either want to pick their own shares or who want to leave the decisions up to their financial advisers.

By investing through the Plan, dividends will be free of personal income tax and there will be no capital gains tax liability when shares are sold. Transactions are based on the amount you instruct the company to invest in a particular stock, so the number bought on your behalf will be dictated by the prevailing share price on purchase.

The minimum investment in the S&P plan is £l,000 for each shareholding. It comes under the category of a general PEP, so the maximum investment in a year is £6,000.

Before deciding on a self- select PEP plan, investors should consider how broad a spread of shares the company allows you to invest in and what charging levels they apply.

Also consider what happens in a rights issue when you hold shares, what happens to your voting rights and whether you can attend AGMs if you want to.