It is sometimes surprising how easily we can forget things, from picking up that last minute birthday or anniversary gift to completing our tax returns on time.
So when it comes to tax-free investing could we ever forget about the personal equity plan with all its wonderful complexity?
Well you may be surprised to learn that many investors still view their Peps as something that has been frozen in time and like the numerous Millennium time capsules that have been buried, can only be opened at some future date unknown to man or beast.
Fortunately, those of us with better memories and a more realistic view to long term financial planning are able to take a more sensible view on how to maximise the tax free advantages of Peps, which for many investors will form a substantial part of their investment portfolio.
End of the beginning
Peps may have come to the end of their natural life with the arrival of individual savings accounts (Isas) in April 1999, but there is no reason for investors to suffer lacklustre performance from their existing holdings. Like any other investment, they need to be monitored regularly and if they lose their competitive edge then it's time to take action.
If an investor was a serial Pep investor and every tax year made full use of their Pep allowance, it is likely the critical mass of their investments are in the UK. This is because of the qualifying restrictions, where only 25% of the investment could be outside the UK, and later outside Europe.
Although no one can make fresh investment into Peps, it is important to review a client's Pep plan on a regular basis to ensure they can continue to meet long-term investment objectives as they change over time. That's where the benefit of a Pep transfer or Pep switch, comes into its own.
Maximising the benefits
There remains considerable misunderstanding among investors as to what they can and cannot do with poorly performing Peps or plans that no longer meet expectations for income or capital growth. Pep transfers have only developed in significance over the last 18 months or so. But they are an important ingredient in successful investment, and gradually becoming more commonplace. Figures from the Association of Unit Trusts and Investment Funds (Autif) show that 23% of Pep holders have transferred their Peps in the last year.
So what can be done to meet the needs of the hundreds of thousands of Pep investors whose plans may no longer be delivering what is expected or needed?
There are two approaches that can be adopted which will allow investors to maintain the tax free shelter which a Pep provides but will also allow them to maximise their benefits.
Firstly, switching between funds within an existing plan manager could have the desired effect. This is easy to do by simply asking the plan manager to make a switch and it will be done, although there may be a charge for doing so. Moving investment funds within existing Peps is relatively simple, although you need to be careful and aware of the rules concerning qualifying and non-qualifying investment funds. Pep restrictions on investments mean that only some funds are available to transfer into, and choice will be restricted further if the investor is looking for an international orientated holding such as a Japanese or North American fund.
Secondly, there is the right to consider a transfer of existing Pep investments to another investment manager.
So why would you want to transfer instead of switching?
There is no doubt that a number of investment groups have built outstanding investment records over the years, either generally across their range of investment funds or more often in selected investment areas such as the UK or Europe.
Measuring up
Although it would be wrong to make too much of a generalisation here, in many cases the major reason why an investor would consider transferring their complete Pep portfolio would be to benefit from a wider choice of better performing funds. The choice of fund manager will also play an important part, as investors need to feel a level of comfort that the new manager of their Pep can do a better job than the last one.
The point about potential performance concerns was highlighted by a recent published study.
This survey concentrated on the UK All Companies Sector, where the greatest percentage of Pep money is. Ranked in quartiles, the survey found of the £54.5bn invested in the sector only £9bn (16.5%) was in the top quartile.
So how can you judge if any fund is not up to scratch?
It might be growing in value, but that doesn't mean it is performing well. Comparisons need to be made with the performance of similar investments. Even if a fund has increased by a reasonable amount, it might still be underperforming against its sector.
Alternatively, the fund, and others in its sector, is losing money. If this is the case, the poor performance maybe down to local market conditions.
The decision then is whether there is a belief that this market will recover, if not, then a switch of fund with the same manager may be an option or alternatively it may be more appropriate to arrange a full transfer to another manager with proven expertise in another more lucrative market.
But performance or the lack of it should not be the only reason for recommending a transfer or switch.
A portfolio of funds should be diversified, not just in terms of assets, but also geographical distribution. If a Pep portfolio is predominately UK based, as many of the original Peps are, then there is an opportunity to diversify the investment across other markets such as Europe the USA or Asia (within the Pep limits)
By transferring a Pep to another manager, you may be able to fulfil more easily your clients investment objectives, especially if these have changed over time.
For example, as the investor grows older and nearer retirement, they may wish to move out of growth funds into income funds which, sheltered in a Pep, will pay an enhanced income because of the tax privileges. Many investors have a collection of Peps held with different plan managers. By transferring these to one Pep manager you can simplify their investment. One manager means just one statement, a single source of income payments and a lot less paperwork for clients and you.
All or nothing
Investors who have several Peps with the same manager accumulated over a number of years are likely to find that, for cost reasons, their plans have been amalgamated - effectively, into a single unit of investment.
This could prove difficult if, as in our example, a client is disappointed with the performance of one particular Pep plan taken out in a particular tax year but perfectly happy with the rest. If this poor performing plan is one among a handful with the same plan manager, then the client is likely to have to transfer the whole lot.
In this case a switch to another fund with the same manager would be the better option.
What it costs
Remember Pep transfers do not come without their associated costs. For a start some Pep providers may charge an exit penalty for the transfer of recent investments. Then on reinvestment of the transfer proceeds the new plan manager will levy the normal front-end charge for investment, typically 5.25% although many now offer discounts to encourage inward Pep transfers.
A simple process
If after all the relevant considerations you feel a transfer to another plan manager is the most appropriate course of action the process itself is relatively painless. However it's worth realising at this point that the process can be rather slow as the new Pep manager is dependent upon the old plan manager to provide the proceeds for reinvestment
A simple choice?
What type of fund to transfer a Pep to can be a conundrum when faced with a choice between an income and growth fund. The distinction between a pure income fund as against one designed for growth has become increasingly blurred over the last year with many income funds providing long term capital growth through the choice of high yielding growth stocks, therefore providing a total return, rather than an increasing income yield.
However, the real choice will, as always, depend on the needs of any particular client. Therefore the real value in a transfer has to be seen from a clients perspective to ensure that in the long term they will benefit from the memory of the product we called Pep.
Alistair Campbell is head of UK marketing at Invesco Asset Management