It has taken a while, but Bank of Ireland's life assurance arm, Lifetime, has finally brought out its own version of PIPS and PEPS. These popular, low-cost regular savings' policies were first launched in 1995-96 by Ark Life (AIB's life assurer). They are now available in one or the other version from companies, such as: Irish Life, Friends Provident, Irish Progressive, the EBS Building Society and others.
PIP and PEP are the acronyms for Personal Investment or Personal Equity Plans. The PIP offers a low-cost managed fund option with standard rates of tax applying, while the PEP is a Special Investment Policy mainly invested in Irish equities and carries a 10 per cent tax rate. The Lifetime PIP requires a minimum investment of £50 a month, the PEP £100, though the latter restricts the overall investment to £75,000 per person or £150,000 per couple. This takes into account any other low-DIRT Special Savings Account held.
The PIP offers the saver a choice of two investment funds: the Investment Growth Fund or an Investment Opportunity fund. The latter being slightly more exposed to Irish equities than the former. As managed funds, they both have a proportion of funds in property, cash and gilts as well as equities. The PEP requires that a minimum of 55 per cent of the fund is invested in the Irish stock market, 10 per cent of which must be invested in smaller listed companies. The balance is then put into cash deposits and gilts. One of the biggest attractions of these policies is that there are no entry charges or commissions deducted from your initial contribution. There is a 5 per cent bid-offer charge, which is made against the value of the units that are purchased and paid out when you encash your fund; but until then, every penny saved is invested. (If you contribute more than £250 a month, Lifetime will reduce the bid-offer charge.) The annual management fee is 1.60 per cent for the PIP and 1.75 per cent of the PEP. Unlike older style life-assurance savings plans in which charges were entirely front-loaded and resulted in up to the first two years' worth of contributions being absorbed, there is an underlying value in all PIP and PEP funds right from the start. Policyholders are less likely to suffer serious financial losses if they do have to encash early that is, say after the first five to seven years. Nor are there any penalties if the contributions are reduced or even if they are stopped and started at any stage. That said, because of the bid-offer spread and the relatively high annual management charge (other managed fund investments tend to charge a standard 0.75 per cent annual management fee), PIPs and PEPs still need to be regarded as medium- to long-term investments, say at least seven to 10 years. Unlike tracker bonds, for example, there are no capital or profit guarantees with PIPS and PEPS, so investors should be prepared for the market to go up and down over a longer period. (Some commentators suggest that lower returns are more likely since the bull market cannot go on forever.)
The tremendous success of the PIP and PEP (Ark Life has dominated the market to date) is a reflection of both the collapse of the conventional life assurance savings policy market which because of the high charges proved to be very poor value for anyone saving for less than 15-20 years; and also because of the huge success of the Irish and international equity markets since 1995.
According to Mr Brian Woods, Ark Life finance director and actuary, the higher contribution/lower tax PEP was not considered the ideal savings product when it was first launched: "I have to admit we were all less than enthusiastic about it at the beginning because of the strict requirement to invest 55 per cent of the fund in Irish equities. But this has proved to be a huge advantage because of the performance of the Irish stock market." Sales of the PEP are outstripping the PIP, he says, as depositors, who have seen their Special Saving Account interest rates fall and DIRT rates increase from original levels of 10 per cent to 20 per cent today, seek a new home for their savings. PIPS and PEPS are not really suitable for anyone looking for an income, and their future returns may not be as remarkable as they have been as a result of the stock market bull run of the last few years. Before any investment is made: savers must assess their own attitude towards risk-related investments; they have to have a clear savings time frame in mind (if it is too short, they may get caught if the market moves downwards); and they need an independent assessment of the strength of the underlying stocks and investments that support these policies.
The historical performance has certainly been very good, but is unlikely to be repeated in the short term. Lifetime suggests that had someone invested £5,000 in the bank's managed growth fund (like the one represented by its new PIP) over the past 10 years a total of £12,914 (a profit of £7,914) would have been received, as opposed to £6,564 from An Post, or £6,864 from a typical building society account.
In a real case scenario, Ark Life told Family Money that people who had invested £100 a month in Ark Life's PEP since its inception just over two years ago now had £4,080 in their accounts on total contributions of £2,800. A conventional savings plan one in which the nil-contribution period is six months because of the up-front commission would be worth £1,000 less. Because neither bank pays commission to outside intermediaries, PIPs and PEPs are unlikely to be promoted by conventional brokers. Unless you deal with a fee-based financial adviser you will have to compare the different ones on the market yourself before making a final choice. Finally, though the PIPS and PEPS may be the favourite saving option for someone with a regular amount to save each month, there are single premium versions of the PEP that are also worth considering because of the low DIRT rate. There are also other investment bonds, unit-linked and with-profit that will produce good long-term returns.
When choosing such a bond, it is important to take into account the short- and long-term performance of the fund manager and the charges. Most entry charges range from 35 per cent and the management charge again, usually 0.751 per cent. Ark Life's single premium Special Investment Bond, for example, has no entry charge, but the annual management fee is 1.75 per cent. Many investment bonds are conventional, managed funds in which the underlying fund is invested in a mixed bag of stocks, Government gilts, cash and some property. You can opt for a more specialist international fund, if available, though advisers often recommend the services of an international fund manager whose expertise and track record in a certain country or region's markets is well established. Anyone seeking an investment option for a lump sum should always seek independent financial advice. Ark, Lifetime and Equitable Life make the point repeatedly that because they don't pay commissions to intermediaries, their low-cost, lump-sum bonds are not likely to be recommended by brokers who are paid commissions. A fee-based independent intermediary is more likely to consider such funds on their merits, they say.
