Fixed-interest PEPs rush to get a head start

A rash of low-risk personal equity plans that invest wholly in fixed-interest securities are being rushed on to the market even before the new rules come into force in April.

Clerical Medical's Extra Income PEP will start out under the current PEP rules with half the funds in blue-chip equities and half in fixed-interest securities.

After April, when the requirement to invest at least half the portfolio in equities is lifted, the fund will sell all the equities and invest wholly in qualifying bonds. The yield on the fund will rise from 6 per cent to 8 per cent.

Christine Farquhar, head of fixed-interest securities at Clerical Medical, said: "We are going to go for big, quality companies - the more secure issues. We think this is a good time to invest in bonds.''

The returns on the fund will come purely from the income generated. Clerical Medical will not be doing any short-term trading to try to enhance the capital values. There is an initial charge of 3.25 per cent and annual charges of 1.15 per cent.

GT's High Yield Fund, a unit trust investing in corporate bonds, is launched this month with the promise of a free switch into a PEP in April.

The fund will have a starting yield of 8.5 per cent and quarterly payment dates.

Martin Harrison, managing director of GT Unit Managers, said: ``The decision by the Chancellor to allow the inclusion of corporate bonds within a PEP is a tremendous boost for investors, particularly those looking for a high and stable income.''

He expects investors with funds in banks and building societies to be tempted away by the new PEPs. "This is an entirely desirable development in view of the relatively low inflation and interest rates that we expect to prevail in the UK for the foreseeable future.''

He said the fund was being launched ahead of April because it was possible that bond prices would rise as more funds were launched to take advantage of the new rules.

Whitechurch Security, a Bristol-based independent financial adviser, has launched its Fixed Interest PEP already. Investments made before April will be held in cash, and then invested when the new rules come in. In the meantime the cash will earn 5 per cent tax-free. When the PEP is invested it should yield about 8.5 per cent.

The Fixed Interest PEP has an initial charge of 6 per cent, with a 2 per cent discount at the moment, and an annual charge of 1.5 per cent.