Interest yourself in savings

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By the time this article appears, we will be in the final countdown towards a new-style tax-free Individual Savings Account (ISA). The Chancellor will have announced the Government's plans, including whether he is prepared to extend the proposed pounds 5,000-a-year limit - up to a pounds 50,000 lifetime maximum - on investments into ISAs.

No matter what he says, there are at present still two tax years' worth of PEP allowances to take up: for 1997-98 and 1998-99.

If an individual were to invest his or her full allowance into a PEP this year and next, they would be able to stash away up to pounds 18,000 under a tax-free wrapper, ready to transfer into an ISA in April 1999.

Even over one year, the tax-free benefits of a PEP are worth having. Assume that you could place pounds 18,000 into PEPs and they grow at an annual 9 per cent, a projected growth rate allowed by regulators. In 12 months, that's pounds 1,620 earned - without paying any tax on either the income or any capital gains (assuming other investments).

After April 1999, you could transfer that amount into the ISA, where it would continue to grow (subject to the upper investment limit). At the same 9 per cent projection, after two years, the interest earned just on the interest from the original PEP would be pounds 1,765.80, growing to pounds 1,924.72 after three years and pounds 2,286.75 after five years - still tax free.

A free guide produced by The Independent offers tips on how to choose the right investment. The Guide to Making Your Investments Work for You discusses the various options available to investors. The guide, sponsored by Wesleyan Financial Services, is available free by calling 0800 1379749. Or fill in the coupon on this page.