Pep era ends with a rush to buy

THE GOVERNMENT'S long-awaited scheme to encourage retail investors into the equity market finally got off the ground yesterday when the first Individual Savings Account (ISA) was sold in the early hours of the morning.

Ash Rawal, 38, a corporate consultant from Derby, became the first owner of an ISA, the Government's replacement vehicle for PEPs and Tessas, the tax-efficient vehicles that stopped being sold on Monday.

Mr Rawal bought his ISA from Charles Schwab Europe, the Birmingham-based retail stockbroker, at 12.01 am, just one minute after ISAs officially went on sale. In the run-up to Monday, investors were pouring money into PEPs at four times the normal rate.

Financial experts fear the public may have rushed to buy Tessas and PEPs simply because they were disappearing, rather than because it was in their best interests.

Philippa Gee, of advisers Gee & Company, said: "No one should be doing something like this - particularly if they are basic-rate taxpayers - just because of the tax benefits. If customers didn't do it until the last minute there's got to be a reason why they didn't - only time will tell whether their decision was right or wrong."

The advisers point to anecdotal evidence that non-taxpaying customers bought Tessas and PEPs ahead of the deadline. Non-taxpayers can get the same tax benefits by investing directly into a unit trust. Buying a unit trust on its own is usually cheaper because charges are lower.

With the FTSE 100 hitting new records, advisers also fear many basic- rate taxpayers have been bounced into buying an equity PEP because of the deadline when they could easily have afforded to invest at a later date. PEPs attract a 10 per cent tax credit on the growth of equity investments, and the payout is tax-free, but ISAs have the same benefits.

The advisers also warn that PEPs are also inferior to ISAs in some respects, allowing up to pounds 6,000 to be invested in the first year against pounds 7,000 for ISAs. Investors in ISAs can also spread their risk wider, investing in equities across the world. PEPs limit a large part of the investment to European equities meeting certain defined criteria.

Geoff Kangley, of Sheffield-based Kangley & Co, said: "My customers have almost taken out PEPs against my advice. Some experts think the market is too high right now to invest in equities. It is almost as if people rushed to invest not because it was a good idea, but to spite the Government's new plans."