Personal finance: Add some PEPs to future plans

THE MAKEOVER

Name: Phil and Jane Dunn

Occupation: Advertising make-up manager and occupational therapist.

The problem: How to find the most tax-efficient way of making the most of savings and providing for their daughter - who was excluded from receiving windfall shares because of her age.

The advice: By making the most of tax-free allowances in PEPs before they disappear next year, the Dunns can maximise the opportunity to make their money grow.

Having a young daughter just two years and 10 months old has made Phil Dunn and his wife, Jane, think long and hard about their future financial planning.

Phil, 44, who works as an advertising make-up manager, has so far been wary about putting money into personal equity plans (PEPs) because of the longer-term commitment which this type of investment requires. However, now that Phil enjoys a greater feeling of job security, he would like to consider this tax-efficient means of saving since clearly, as a borderline higher-rate taxpayer, earning pounds 30,000 a year, any tax saving is important.

The Adviser: Graham Bates, of the leading independent financial adviser Bates & Partners, based in Leeds. Telephone: 0113 295 5955.

The Advice: There are two channels available to Phil as far as PEPs are concerned. The first is to choose the regular savings route, which would allow as little as pounds 20 per month to be squirrelled away from any surplus monthly income. Alternatively, Phil could choose to invest a lump sum. But he will need to act quickly if he wants to make use of his general PEP allowance for the current tax year, which ends on 5 April. PEPs are in their closing stages, with no further investment expected to be allowed after 5 April 1999, so Phil would be wise to make the most of any allowances before they disappear.

One option would be to use some of the capital, which is presently sitting on deposit. Phil has a balance of around pounds 6,000 held in a savings account with the Clydesdale Bank earning 5.2 per cent net. Although this is a fair rate for a short-term investment, there is the potential for a significantly higher return proving Phil can invest for five years or longer and is willing to accept a medium-risk strategy, which he says he is happy to do. Since maximising long-term capital growth is his primary objective, he would be sensible to consider investment vehicles such as PEPs, which can provide this potential.

Marks & Spencer unit trust

Jane, who works as a Probation Officer, has already dipped her toe into stock market waters by taking out a PEP which invests in a Marks and Spencer unit trust.

The plan has a current value in the region of pounds 7,500 and Jane has already earmarked this investment for the future - to help towards the cost of her daughter's school fees. One of the benefits which PEPs offer is the flexibility to access the money as required and of course, the proceeds can be used for any purpose.

Tessa roll-over

The Dunns have both made use of Tessas. Phil has an account with the Abbey National to which he has contributed all but the final pounds 600. Jane's first Tessa has already matured and she has opted for a second "roll-over" account, taken out through the Melton Mowbray Building Society.

By choosing to roll-over the pounds 9,000 capital, Jane keeps her money in a tax-free environment for a further five years, even though new Tessa investments will no longer be allowed following the introduction of the new Individual Savings Account on 5 April 1999.

Phil, however, would be wise to consider a variety of options before he opts for a second Tessa, since other types of investment might prove to be more fruitful in his quest for capital growth, particularly if he is willing to accept a balanced approach to risk.

The Woolwich account

The future of their young daughter is clearly a priority and Phil has already established a savings account with Woolwich for her benefit. Each month, Phil pays pounds 20 into the account plus whatever is in his daughter's money box, usually bringing the total to around pounds 30. According to Phil, the return is miserly but his biggest gripe with Woolwich is that, being a minor, his daughter did not qualify for windfall shares when the society converted last year to a bank. Understandably, therefore, Phil has very little loyalty to the Woolwich and wants to know what he should do with these funds (about pounds 1,500 to date) to give his daughter the best start in life.

Given the benefit of the long-term investment horizon, which is possible because his daughter is still so young, the sensible approach would be to invest the capital in an environment which offers the potential for substantial long-term capital appreciation.

A deposit account is definitely not the right home for these savings. Phil should consider using one or more unit trust funds and he would be wise to seek the advice of an independent adviser. Many unit trust savings plans will also accept on-going monthly contributions and this is an excellent way to save because you get the benefit of the "smoothing out effect" on unit prices.

The pension

Another consideration for Phil is his pension. As a member of his employer's scheme, he contributes pounds 100 each month but admits that he has not changed the level of contributions in the last nine years. At 44, he should address the question of maximising pension with his adviser at the earliest opportunity.

Fortunately, Phil and Jane have a small mortgage of just pounds 26,000 against their home, which is valued at pounds 125,000. Last year the mortgage proved to be a benefit when Phil received 200 windfall shares as a result of Halifax's flotation. Wisely, he has clung on to the shares, which have so far proved to be an excellent investment. Who knows what they might be worth when his daughter comes of age!