Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.

PIPs and PEPs

Could you please give me some advice as regards PIPs. Are they investments that you would recommend or should one stay clear of them? Are PIPs such a good idea if the stock market fell apart as they are basically investments in the stock market?

Mr O.O'H., Dublin

The very first thing to say is that I do not and cannot recommend any investment product. Quite simply I am neither competent nor licensed to do so. Having said that, Personal Investment Plans (PIPs) have had a sound record since their introduction and, together with Personal Equity Plans (PEPs) have numbered among the fastest-growing investment options in the Irish market.

Essentially PIPs are life-assurance products with the emphasis on investment rather than life cover. They are unit-linked managed funds directed at small investors. Their relatively low cost is more transparent than it was in some of their precursors.

Contrary to your belief, they are invested in funds with a reasonably broad mix of government stocks, shares and cash, while PEPs concentrate on the stock market.

Investors can pay into such funds either by monthly or lump-sum investment, although the former is the more usual method. The most important thing to bear in mind - apart from one's attitude to risk - is for how long one wishes to invest the funds. A PIP is designed for medium-term investments - up to 10 years and certainly for not less than between three and five years.

PIPs, as the name implies, are not as high risk as PEPs as they are not invested in equities (stock markets) to the same degree. In recent years, given the bullish performance of the market and bearing in mind the lower tax levied on PEPs to reflect their investment in smaller Irish public companies, it is not surprising that PEPs have outperformed PIPs. Now, however, the market outlook is less certain. In addition, the tax advantages of the PEPs are not as generous as they were. They used to attract tax at 10 per cent but this has now risen to 20 per cent. At the same time, tax on PIPs has fallen from 26 per cent to 24 per cent. This has led some financial institutions to stop selling PEPs altogether.

PIPs allow smaller investors to get balanced exposure to the markets through managed funds. Charges are more transparent and are levied on an ongoing basis rather than the front-loading practice for other products, which effectively reduces the amount invested in the early years.

Such charges comprise management fees and spread charges incurred buying and selling units in the fund. Funds invested are immediately allocated to investment units and the funds can be withdrawn at any time without penalty.

It is important to remember that past performance is no guarantee for the future. In a worst-case scenario, neither the capital nor the return is guaranteed. However, with their relatively broader investment mix than PEPs, PIPs are not as reliant on stock-market performance.

Wills and probate

Turning again to the issue of wills, probate and testamentary expenses raised by Mr A.H. from Louth and covered in this column last week, I am grateful to solicitor Mr Niall Murphy, from Ballincollig, Co Cork.

He confirms that probate tax is not a testatmentary expense but a charge on the inheritances of each of the beneficiaries under a will or the net estate. He explains that the sum due to beneficiaries should be net of the pro-rata share of the tax.

Probate tax is levied at 2 per cent on the balance of the estate after all other liabilities and expenses have been paid. An exception is made for estates left to spouses, which are exempt, as are those estates where the net value is less than £10,980 (€13,941).

Other exceptions for the purposes include charity donations, houses or part thereof passing to dependent relatives who lived in the property prior to the death of the benefactor, certain heritage property and insurance policies taken out for the purposes of meeting inheritance tax bills. Certain government investments are also deemed to be exempt for the purposes of the tax.

Testamentary expenses, as explained last week, encompass those costs involved in administering or proving the will, such as ascertaining that all the estate's creditors have been given notice of the need to file claims. It would also include the payment of any debts outstanding at the time of death, such as ESB or phone bills, for example, and such things as funeral expenses.

As Mr Murphy explains, the importance of treating probate tax as a pro-rata tax on the beneficiaries is to ensure fairness. He recalls episodes where the bulk of the will has been in the form of land to be passed on to one beneficiary. Solicitors have, he says, incorrectly used the cash balance to meet all expenses and treated probate tax as an ordinary expense, taking it, too, out of the cash balance before distributing the proceeds under the will.

Such a move effectively means the person receiving the land has paid none of the probate tax as he or she still receives the plot intact, whereas those beneficiaries receiving from the cash element of the will have paid probate tax on both their amounts and on the land - an unfair position.

In practice, of course, the tax is paid as a lump sum; it is simply a matter for the executor - be it a solicitor or anyone else - to ensure that it is fairly apportioned to all beneficiaries under a will in proportion to what they receive from the will. But it does show some of the complications that can arise in executing wills and the reason why many people do use a solicitor as an executor or else, as an executor, go to a solicitor for advice. Remember, that too is an allowable testamentary expense.