How does Investing in Stocks Work

Anyone who is resident in the UK and over eighteen may invest in a PEP. The PEP has to be managed by a person who is authorized to do so under the Financial Services Act. Currently, you can invest up to $6,000 a year in a General’ PEP and up to a further %3,000 a year in a Single Company’ PEP. Thus, a married couple can invest up to $18,000 per annum in PEPs which is a substantial sum for most UK wage-earners.

PEPs are free of tax on their dividends and there is no CGT to pay on profits made from selling shares. Money held on deposit within a PEP is exempt from tax on the interest it earns, so long as the money is used to buy securities later.

Although PEP dividends are tax free, 20 percent of their value is paid the Inland Revenue by the PEPE manager, who subsequently reclaims the money on behalf of the investors and returns it to their PEPE accounts this is an administrative advantage which is sometimes overlooked-small investors can avoid a large amount of paperwork by investing through a PEPE.

Following a relaxation of the PEPE rules, investors may cash in their PEPs at any time and stil retain their tax breaks; some managers make a charge for early withdrawal, but for early surrender of such things as endowent policies.

You don’t have to put a lump sum into a PEPE. You can make a monthly payment into a scheme. The only restriction is that you can not make regular payment into more than one scheme at a time.

The way peps work
There are a variety of PEPs on offer: self select PEPs. In this kind of scheme an investor decides how the money is invested. The manager of the plan takes a small fee and executes the investor’s trading instructions without giving advice. ADVISORY PEPS. A little more expensive than self-select PEPs, these are where the plan manager does give some advice on investments. Often these schemes are only available to a brokers well established clients.

Managed or discretionary PEPs. This is were the investment decisions are made by the plan manager, not the individual. Corporate PEPs. These usually are for shares in one company and are most often used as part of an incentive scheme for employees of that company. Single company PEPs. these are restricted to shares in one company, with fewer restrictions than corporate PEPs. they are useful to investors who have already invested the annual maximum of $6,000 in a General PEP and wish to invest up to $3,000 more. Unit trust and investment trust PEPs. These PEPs invest exclusively in unit trusts or investment trusts from a list chosen by the plan manager. Managed and self-select plans are available.

More on the tax advantages. The two big advantages of PEPs for the private investor are: 1. A big reduction in costly and time consuming paperwork. 2) The tax concession. Despite reductions, income tax is still a substantial burden for British residents, particularly those who pay the high rate of 40 percent. Those paying tax at the basic or lower rate may find that the tax saving is small in the early years after the deduction of set-up charges, say $20, and annual management investment grows, the saving swill too. Capital Giants Tax (CGT) is now indexed against the retail price index (RPL), it is difficult to calculate how much the CGT will be if you sell a particular investment. Capital loses can set off against future gains. Since PEPs are exempt from CGT, they are clearly essential for any investor who ready pays CGT. Those who do not current pay CGT exempt vehicles, such as their own homes, pensions schemes, gifts and insurance policies, PEPs offer a chance for such individuals to invest in the stock market while still enjoying CGT exemption.
PEP rules in more detail. Despite the increased flexibility of PEPs there are some restrictions that you should aware of. Maximum allowances. As already mentioned, the maximum annual investments allowed are $6,000 into General PEP and $3,000 into a single company PEP. Generally, PEP managers charge their fees on top, so the whole $9,000 can be invested. There are no minim limits, you probably won’t find a manager who will let you invest less than $50 a month, except unit trust and corporate PEPs. The annual allowances cannot be taken forwarded into future years, so for example, if you only invest $8,000 in one year, you cannot bring forward the unused $1,000 of the allowance to the following year and add it to the $9,000 pound allowance for that year. Another point to remember is that if you want to make up your allowance towards the end of a financial year (which ends on 5 April) you need to invest at least a fortnight before the year end to give PEP managers time to do the necessary paperwork for setting up, topping up, the PEP.