Cut through the hype to land the right PEP

Never mind the sales frenzy, here are the facts

If you think the PEP advertising frenzy is bad now then you won't enjoy March. Personal equity plans shut for business on 6 April, after which it will be impossible to take a new one out. And investment managers are spending tens of millions of pounds to do everything possible to lure you in during the next six weeks.

PEPs do represent a good deal, provided you are fully aware of the risk you are taking. The PEP rules allow you invest up to pounds 6,000 in shares (known as "equities", hence the "equity" in "personal equity plan"). The shares are usually bought by a unit trust or investment trust that pools investors' money.

You don't need to declare a PEP on your tax return and everything you make is tax free. (There is also a further PEP allowance of pounds 3,000 so long as you invest the money in a single company.)

If you don't have the money to invest now, don't worry. The new individual savings accounts (ISAs) will replace PEPs in April and you can put exactly the same type of stock market investment into an ISA.

You can put pounds 7,000 into a stock market ISA in the next tax year, and pounds 5,000 each year after that. No wonder many commentators have labelled them "PEPs by another name".

The tax benefits of PEPs and ISAs are a bonus. But remember, while a PEP does increase the money you can make from your investment, it does not remove the risk. Equity investment is a risky business.

Many providers are currently trying to tempt first-time investors into tracker PEPs. This sort of fund simply copies one of the major share indices - usually the FT-SE 100 index of the UK's biggest companies or the FT- SE All Share, made up of all the companies traded on the stock market.

If that index goes up then your money goes up by the same percentage - although charges and errors in tracking the index will mean you will probably get back slightly less than the growth in the markets.

The key to choosing which tracker PEP to invest in is the charges - the lower the charge, the more you will make. Justin Modray, an IFA at Chase de Vere Investments in Bath, says: "Legal & General's All-Share Tracker is one of the cheapest on the market, with no initial or exit fees and an annual management charge of just 0.5 per cent."

Alternatively, if you want an actively managed fund, Mr Modray highlights Jupiter's Income Fund as one to consider. But he warns investors to prepare themselves for the high charges that active funds carry - 4 per cent on the initial investment and a further 1.5 per cent each year on this particular PEP.

There's no need to pay high charges if you can make up your own mind about which PEP you want to buy. A discount broking firm will send you useful literature and performance statistics. You buy the PEP and get most or all of the initial charge rebated. Most discount brokers (see below) are rebating the 4 per cent charge on Jupiter PEPs.

You can sidestep some of the risk from shares by buying a corporate bond PEP. These funds invest in bonds (IOU notes) issued by large companies. They are geared towards paying an income rather than building capital, but many people re-invest the income into their PEP.

Mark Dampier, head of research at Hargreaves Landsdown, an IFA, says newcomers should take a cautious view: "You should go for something with a decent yield but not too racy - CGU's Monthly Income Plus and Credit Suisse's Corporate Bond are two good funds."

But if you want to get a higher return some bond PEPs are giving 8 per cent or more a year, tax free. However, they do carry more risk. The extra return comes from the perceived extra risk of buying bonds issued by companies with a lower credit rating than those held in the more conservative funds.

All PEPs are available cheaply through discount brokers: Chelsea, 0171- 351 6022; Elson, 0800 096 1111; Hargreaves Lansdown, 0117-900 9000; The PEP Shop, 0115-982 5105. To find a local IFA call 0117-971 1177.

Tony Bonsignore is news editor at 'Financial Adviser' magazine.

Free PEP guide offer

The first 50 Independent on Sunday readers to e-mail or send in cards will receive a free copy of the Moneywise Which PEP? guide, worth pounds 3.50. The guide tells you how to get the best PEP deal and gives advisers' tips for best buys.

Write to PEP Offer, Personal Finance, Independent on Sunday, One Canada Square, London E14 5DL or e-mail your name and address to i.berwick@independent.co.uk.