The good news is that under the ISA proposals, as they stand, you will be allowed to transfer up to pounds 50,000 worth of PEP assets into ISAs in 1999. And all income and gains on assets held in ISAs will continue to be tax-free, just as they are in a PEP. If you are sure you won't go over the pounds 50,000 limit, ISAs will not be a problem; you'll simply roll over your investments.
However, the outlook is not so bright if you're likely to have PEP assets worth more than pounds 50,000 by April 1999: you face losing the tax breaks on investments that you can't transfer.
Emma Weiss, spokeswoman for the unit trust and PEP managers organisation Autif, believes all investors should continue to use PEPs until the last moment as "they will still be getting that tax-free boost". She points out that PEPs are not investments in themselves. Rather, they are a wrapper in which you can protect certain assets from tax.
The bottom line is that if you would not buy the investments if the tax benefits were unavailable, you should not hold a PEP at all. Only ever invest because you believe in the value of the underlying investments.
Don't worry about having to sell assets that do not make it into an ISA. The fact that you will pay tax on certain investments isn't a reason not to buy them. "If you're going to buy equities, buy them now and get a year of tax relief," says Roger Cornick of the PEP company Perpetual.
Remember, the rules about ISAs are not yet set in stone. Following a consultation exercise during which investors and companies protested strongly about the pounds 50,000 limit, it is possible it will be raised or that investments held in existing PEPs will remain tax free even if they can't be transferred into an ISA.
However, before buying a PEP, make sure it's really suitable for you. Not everyone actually needs the tax breaks that PEPs offer. Non-taxpayers are an obvious example, but other investors may find the breaks aren't that worthwhile. Everyone is allowed to make a certain amount of capital gains each year without paying tax - pounds 6,500 in 1997/98. Only a few investors are ever liable to this, so in practice the benefit for most people with a PEP is the tax-free income.
Bear in mind, too, that if you have to pay an additional charge to hold investments in a PEP, this will eat into your tax savings. This is not the case with most unit trust PEPs (including the index-tracking funds), but if you pay more in additional charges than you save in income tax, your PEP is actually losing you money each year. Higher-rate taxpayers are less at risk of this as they save more tax from PEPs.
Rachel Medill, a director of M&G, one of the largest PEP providers, points out that even if you're not going to use your capital gains (CGT) allowance in this year, you may do so in the future. Also, she argues, "we know the Government is going to review CGT in the next Budget ... the rules may change significantly."
On this reasoning, most investors will want at least to consider PEPs before they're abolished. As Roddy Kohn, of independent financial adviser Kohn Cougar, says: "There's still another year and a bit to shelter gains and income from tax, and the PEP rules are pretty generous."
You can put up to pounds 6,000 worth of assets in a general PEP in any one tax year. Most people buy PEPs where a fund manager makes investment choices on their behalf, usually through a unit or investment trust. These funds invest in shares and bonds.
To qualify for the full pounds 6,000 allowance, at least half the holdings of unit and investment trusts must be UK or European Union companies. Up to pounds 1,500 of the pounds 6,000 can be put into non-qualifying trusts each year. These can invest anywhere in the world.
A range of other investments may also be held in a PEP. In a self-select PEP - where you pick the investments - you can hold individual UK and European shares, certain bonds, gilts and even, for a time, cash.
On top of the general allowance, everyone is entitled to a single-company PEP allowance each year. You may use this to PEP up to pounds 3,000 worth of shares in one company.
The PEP you should opt for depends on how confident you are about investment and why you're investing. Anyone unsure about managing their own portfolio will feel happier with a PEP run by a fund manager.
Many investors benefit from advice. If you do not know any independent financial advisers, IFA Promotion will provide you with a list of those in your area. In addition, Chase de Vere (a firm of financial advisers) and a number of magazines publish directories of PEPs and PEP providers.
q The 'Independent' and 'Independent on Sunday' have a free guide, 'Making Your Investments Work for You', which looks at PEPs as well as a range of other investments. The 16-page booklet is sponsored by Wesleyan, a mutual financial company. For a copy call 0800 137 9749.
q Contacts: Chase de Vere, 0800 526091; IFA Promotion, 0117 971 1177; 'Investors Chronicle', 0171-463 3000; 'What PEP', 0171-638 1916.