According to Hindsight, a performance measurement company, pounds 100 invested each month in the average investment trust would have grown to pounds 23,849 compared to pounds 22,667 in a unit trust. The same amount saved regularly in a building society 30-day account would have grown to just pounds 17,421.
So what is an investment trust? Michael Hart, director general of the Association of Investment Trust Companies (AITC), explains: "It is a company quoted on the Stock Exchange that invests in shares and sometimes fixed- interest securities of other companies."
Not all investment trusts are eligible for inclusion in a PEP. You can invest up to pounds 6,000 each year in investment trusts that have at least half their assets in the UK or the European Union. For trusts not meeting this criterion, the limit is pounds 1,500 per annum.
The advantage of investing in investment trusts through PEPs is that all dividends and gains are free of income and capital gains taxes. The drawback is that there may be charges imposed by the PEP managers. Many investment trust companies have a regular savings PEP scheme that may be cheaper.
There is a huge choice of funds to choose from. If you are a long-term investor, you will probably want a trust that concentrates on capital growth. Some investment trusts offer a particularly high immediate income, others look for a balance of income and growth. There are trusts for different markets around the world and trusts that concentrate on different investment sectors, such as technology.
You will have to consider the level of risk with which you are comfortable, choosing a trust that matches your profile. Are you prepared to take a high risk or are you happier with a lower risk but potentially smaller returns? A trust that invests in a single country, for example, presents a greater risk than a general, international growth trust. The more general the trust, the wider risk is spread.
With so many options to choose from, it makes sense to get expert advice from a broker or financial adviser.
Advice won't normally be free and you will be paying for it in terms of either commission or fees. Commission is normally around 2 per cent of the value of your investment, while fee-based financial advisers may charge anything from pounds 150.
Investment trusts currently held in a PEP will be transferable into the new Individual Savings Accounts, to be introduced in 1999, up to the proposed lifetime pounds 50,000 limit. Even better, all investment trusts will be allowed into ISAs, whether invested in the European Union or not.
q The AITC publishes a useful leaflet explaining how investment trust PEPs work. For a copy, or for more information about investment trusts, call 0171-431 5222.