PEPS: The Final Countdown: Transfer ticket

After 5 April there will be no new PEPs, but we will still have at least pounds 90bn in existing ones. These will be "ring-fenced"; allowed to stay in force until the investments in them are sold or their owners die.

PEPs will continue to be exempt from capital gains tax. Dividend income paid in a PEP will lose a tax credit - "dividend tax relief" - cut to an effective rate of 10 per cent from 5 April and finally abolished from 5 April 2004. But both dividends and the "interest" paid on corporate bonds will be exempt from income tax as at present.

There are already signs that this is leading PEP owners to reassess their holdings, while at the same time sparking off a war among providers, each aiming to capture a share of the PEP transfer market.

The Association of Unit Trust and Investment Fund managers (Autif) reports a fall in the number of individual plans held, from 9.07 million to 8.94 million from the start of last December through to the end of January. This is despite the fact that providers report strong demand for new PEPs before they disappear.

"The only explanation is that plans are being transferred and consolidated into single accounts," concludes Simon Ellis, of Henderson Investors.

PEP transfers between providers are allowed without loss of any original tax relief.

"There are a lot of people out there with several PEPs , often invested into whichever was top performing fund in the year they were taken. Suddenly these PEP holders realise that they have what amounts to a PEP investment portfolio, but without any single rationale or objective."

Henderson has seen transfers into its PEP accounts grow from around 3 to 4 per cent of all new business two years ago to 15 per cent now, Mr Ellis adds: "Many transfers come from the husband and wife simultaneously and the average values are pounds 18,900."

Rupert Tyer, the managing director of Lazard Unit Trust Management, agrees: "What is the point of holding several PEPs, some for growth, some for income and perhaps with uneven performance?"

"The average age of PEP holders is probably 50 to 55, and many of these will look to their PEPs to supplement any pension income they are going to receive in retirement.

"This means that many will switch not so much from growth to income as from re-investing growth and income to making planned withdrawals of both income and tax-free capital gains. The emphasis must fall on the total return available to investors from these funds."

The facility to transfer PEP funds between plan providers has been around since their inception in 1987, and all providers will accept transfers. But the key issues are both terms of transfer and type of funds on offer.

For a start, many providers are in the habit of "bundling" plans taken in successive years by the same customer so that they cannot subsequently be separated. Check on this if you decide to transfer; it may be a case of "all or nothing".

If you do decide to go ahead and put all your money in one fund, it pays also to be sure that the provider is likely to offer alternative funds if your investment objectives change.

When you transfer, check both on the fixed and variable costs of doing so. Most providers charge a "normal" initial charge - up to 6 per cent of your fund value. Commission to an intermediary will likely be in the 2.5-3 per cent range.

"Ask for a discount if you are transferring a large amount," says Mr Tyer. "We regularly accept transfers of pounds 60-80,000, and often commission is cut to just 1-1.5 per cent on these."

Both Henderson and Lazard offer what amount to competitively charged portfolio management services. Their initial charges go up to 4.5 per cent, without any discounts on commission. Lazard also offers three levels of fixed income at 2.5, 5 and 7.5 per cent of portfolio value.

Skandia also competes in this market with its MultiPEP, which offers access to 98 funds managed by a dozen different fund management firms. But this diversity is bought at a cost: an initial charge of 4.5 per cent, plus an annual management charge of 0.75 per cent, with dealing costs of 1.1-1.3 per cent on top, and all on a plan paying annual "trail" commission of 0.5 per cent of fund value.

Elsewhere, look out for providers like Rothschild Asset Management with its Five Arrows "fund of funds". This has an initial charge of 5 per cent, annual charge of 1.5 per cent and underlying annual charges of 0.74 to 0.89 per cent.

Funds of funds are likely to be oversold in the transfer market. A good one provides access to a wide, balanced portfolio for small capital. But all too often they are no better than a portfolio of sometimes underperforming trusts from a single manager.

`The Independent' has produced a free last-minute `Guide to PEPs'. The 28-page guide, by Nic Cicutti, the personal finance editor, discusses whether PEP investments might suit you, how to compare them, what the tax benefits are and what their rules are. If you are considering a last- minute PEP, this guide, sponsored by Scottish Widows Fund Management, is for you. Call 0345 678910