YOUR MONEY: Call to show yields on corporate bond PEPs
Your support helps us to tell the story
From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.
At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.
The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.
Your support makes all the difference.M&G, the biggest single manager of personal equity plans, is worried that the two dozen funds lining up to advertise PEPS invested in corporate bonds are not creating a level playing field for advertising purposes.
The bonds will invest mainly in fixed-interest securities issued by the Government or commercial companies. As such, they earn fixed income yields.
Autif, the trade association of unit trust managers, recommends that fund managers should advertise more than the guaranteed tax-free income their portfolios will earn - a figure known as the distribution yield.
Autif wants funds to quote with at least equal prominence the redemption yield, which includes income and also fluctuations in the capital value of the individual bonds between now and the date they mature. These fluctuations reflect differences between the price at which the bonds were issued or bought by the fund, and the price at which they will mature and be redeemed.
Many existing portfolios contain bonds that were issued when interest rates were higher than now. The fixed interest they earn now looks very attractive so they are now valued above par. They will therefore lose some value by redemption and the redemption yield will tend to be a touch lower than the distribution yield.
But the Personal Investment Authority, which regulates the rules, has failed to give Autif's recommendation the force of its authority, and a number of funds are emphasising the distribution yield and playing the redemption yield down or not referring to it at all.
Likewise, some funds take an initial charge that reduces the capital value and therefore the redemption yield, while others charge against the income, which reduces the distribution yield. Some funds levy annual management charges against the capital value of the fund, which also depletes the redemption yield, but maintains the distribution yield.
Others take the charge against the income, which maintains the capital value but reduces the distribution yield. Funds will publicise the yield that best suits their book.
There is no absolute right way, of course, but investors should be aware of the principles involved and press for information on both yields before they buy.
Join our commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies
Comments