Regular savings: A nest egg for the longer term

Peps and Tessas are a low-risk option, says Ken Welsby

When you are planning a nest egg for the long term - say five years or more - it makes sense to consider a unit trust or investment trust, from which you can expect a much better return than from a savings account.

In addition to their performance, such investments have a couple of other attractions: you can buy them through regular savings plans, and if you hold them through a Pep - a personal equity plan - you will not pay tax on them.

All the big name fund managers operate regular savings plans. Some have minimum payments as low as pounds 20 a month, but most of them want you to contribute at least pounds 50 every month.

You can invest pounds 6,000 in any tax year in a general Pep - one which invests in several different companies. You can also invest a further pounds 3,000 a year in a Pep which holds shares in just one company. Since everyone has an individual Pep allowance, a married couple can both invest the maximum amount.

The only exception is that if the money is put into shares or units which are invested outside Europe, the maximum that can be invested is only pounds 1,500 per person.

Your earnings from investments held in a Pep are free of income tax, and you do not have to pay capital gains tax when shares are sold - providing they have been held for more than a year.

Although there are differences in the way they operate, both types of trust are what's known as "managed" funds. They collect savings from lots of people and employ experts to work out the best way to invest it.

Some funds invest in specific geographical areas such as North America or Asia, while others put the money into specific sectors such as technology.

The first thing to remember about this type of saving is the trade-off between risk and return. Putting your money in a fund which invests in emerging markets such as the "Tiger" economies of Asia can bring high rewards, but it is generally thought of as being more risky than one which invests in UK equities.

Because it is linked to the stock-market, the value of your investment will fluctuate as company performance and share prices generally rise and fall, so you need to hold it for the long term - five years or more.

With more than 1,600 unit trusts - looking after a staggering pounds 109bn of our money - how do you choose the one that's right for you?

Trusts are divided into a number of different sectors, so the starting point is to look at the category which matches your own investment objectives, and then send for information from several different trusts within that group.

If you are looking for a low-risk alternative, then there are corporate bond Peps, which invest in a variety of bonds, preference shares and similar securities. These are generally regarded as safer than equities.

Safer still are Tessas (tax-exempt special savings accounts), which are available from most banks and building societies. Most Tessas currently are offering between 5 per cent and 7 per cent annual interest on your savings but rates and other conditions vary enormously, so it is essential to shop around for the best deal.

All the interest earned is tax free as long as you keep the account for five years. Some Tessas require a minimum opening balance, but they are in the minority.

There are Tessas offering fixed or variable rates. The option you choose will depend on whether you think interest rates will go up or down over the next five years. When interest rates are high it is a good idea to lock into a high fixed rate, but when interest rates are low, as they still are at present, you may prefer to opt for the variable rate product.

If you make regular monthly payments into a Tessa, there is one final point to remember: there are strict limits on the amount that you can invest in the account: up to pounds 3,000 in the first year and up to pounds 1,800 in the four following years - up to a maximum of pounds 9,000.