PEPS: The Final Countdown: Cutting your PEP costs

PEPs direct. As many as one in five of us now buy PEPs and other financial products direct. This means answering an advert or, more often, making a phone call as a first stage to completing an investment.

Behind this lies a revolution in consumer attitudes. "The man or woman in the street now knows at least the general characteristics of a PEP, and does not feel the need to pay high commission for a face-to-face meeting with an adviser when picking one," explains Anthony Yagdaroff, of PEP broker Allen Direct.

"Not so long ago, very few people would have purchased a personal computer by mail order, but now this is commonplace. The same kind of change has happened with financial products, cutting costs as a result."

PEPs will be superseded by the new Individual Savings Account from 5 April, and a boom in their sales is expected in the run-up to this deadline. This gives plenty of reason to look for ways of cutting the cost of taking a plan.

If purchased through an independent financial adviser (IFA), tied agent or company representative, expect commission to be deducted as an up-front charge from the value of your investment. Most PEPs will pay at least 3 per cent of the amount invested or up to pounds 180 if you use the maximum allowance of pounds 6,000.

But if you are tempted to buy direct and cut these costs, then be aware that you can do this from several different sources. Of these the primary one is buying direct from a product provider.

Some of these offer only a limited product range through their own direct sales operations. For instance, Virgin Direct offer only two PEPs; a UK Tracker "growth" fund, and bond and gilt "income" fund.

Neither of these carry any initial charges, and have low respective annual management charges of just 1 per cent and 0.70 per cent. Direct Line are also competing in this sector of the market, with a FTSE 100 Tracker PEP, again without any 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. This ranks second in its sector, UK Equity growth, over one year.

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 which might be more appropriate to your circumstances.

The products they offer carry low start-up charges but also a very limited fund choice. UK Tracker funds are the most common in this category because they are uniquely suited to being sold without initial charge.

Other discounted fund types - particularly those investing into corporate bonds and gilts - involve real risk to capital and require active management. For instance, measuring performance over three years, Virgin's income fund ranks 12th in its sector. This is solid but not outstanding performance, beaten by several funds with higher initial charges.

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

Providers like Perpetual and Fidelity, both of which offer far wider ranges of PEP funds, have been reluctant to enter the "direct" market because they rely so much on other channels to sell their products - particularly IFAs - who in turn rely on taking commission when giving advice.

One way round this is for providers to offer standing discounts on any initial charge, both on PEPs bought direct, and through IFAs. This can cut initial charges to just 2 or 3 per cent.

It also means that they can sell PEPs "off the page" or by phone without losing the loyalty of IFAs recommending their PEPs to existing clients. Either way, you pay the same for your plan.

One way round this is to buy from discount brokers who re-invest or rebate some or all their initial commission, living off a "trail commission" of 0.5 to 1 per cent of the PEPs fund value thereafter. Shop around and this approach can help you buy a managed PEP with no initial charge.

Most discount brokers offer general advice on the past performance of PEPs and risk-reward ratings of underlying type of investments they hold. A few then follow this up with warnings about under-performing plans and preferred alternatives.

Direct Providers:

Direct Line 0845 3000233

Midland Direct 0345 456123

Virgin Direct 0345 900900

Discount Brokers:

Allen Direct 0800-339999

PEP Direct 0800-413186

PEP Shop 0115-9825105