But now time is running out. From 6 April, no new money will be allowed into PEPs, which are being replaced with individual savings accounts (ISAs). So you can expect to see tempting PEP offers over the coming weeks. Groups such as M&G have already entered the fray, offering up to pounds 200 to new investors. Others will include 2 or 3 per cent reductions in their initial charges.
The message from the PEP managers will be "use it or lose it". But much will depend on your tax status and investment aims; as well as the Chancellor replacing PEPs with ISAs, he has also changed the rules on advanced corporation tax (ACT).
Until 5 April, PEP managers will still be able to reclaim this tax paid on dividends by the companies in their portfolios - which makes them free of income tax. For the following five years, only half the ACT can be reclaimed, and from 2004 it will have to be paid in full.
This has serious implications for anyone using a PEP to maximise the income from savings. The effect will be substantially to reduce income. For example, if your dividends currently amount to pounds 100 after ACT, the managers of your PEP scheme will increase this to pounds 125 by reclaiming the full ACT. From 6 April, assuming no growth in dividends, they will be able to reclaim only pounds 11. After 2004 you will receive just pounds 100.
Therefore, taxpayers should seriously consider using corporate bond PEPs to generate a high income if this is the investment objective. Income from loan stocks - corporate bonds, or gilts - unlike dividends, will still be free of tax.
In fact, PEPs in general are best for higher-rate taxpayers, even if they remain in income funds. This is because even with the changes in ACT, they will still generate more income than direct investments, as the rate of ACT is lower than the 40 per cent higher tax rate.
And for anyone seeking long-term growth, the shelter from capital gains tax is a worthwhile benefit, though few investors make more than the threshold pounds 6,800 a year in profits from their investments.
Non-taxpayers can, however, look to invest direct rather than through a PEP, unless they expect to make substantial capital gains. They will still be able to reclaim any tax paid on dividends, unlike PEP holders.
If you are a standard-rate taxpayer, you can invest direct in corporate bond unit trusts. Some groups, including CGU, Fidelity and M&G now offer them outside their PEP wrappers. You could then use a PEP to shelter your investment in funds where long-term capital growth is the aim - or use a growth PEP to produce an income by cashing in some of your gains each year.
Jason Holland, of Best Investment, points out: "Most unit trusts can be bought more cheaply through a PEP than by investing direct. And as the investment should grow, it will be free from CGT. Also, you don't have to declare your PEP holdings on your income tax returns."
It may be a surprise that most general PEPs have lower charges than a direct fund investment. "PEP investors don't move in and out of their holdings as often as those who invest direct," says Ann Davis, director of Fidelity, "so this makes it cheaper for us, and we pass this on in lower PEP charges."
Under the existing rules, up to pounds 6,000 can be invested in a general or self-select PEP and pounds 3,000 in a single company PEP.
The Independent's `Guide to PEPs', by Nic Cicutti, personal finance editor, is sponsored by Scottish Widows Fund Management. Call 0345 678910 for your free copyReuse content