Each year every adult is allowed to invest up to pounds 9,000 through a PEP, which means any money you make comes free of income tax or capital gains tax. Up to pounds 6,000 can be put into a general PEP and the remaining pounds 3,000 can be invested in a single-company PEP, which invests in the shares of just one company.
If you don't make use of your PEP allowance, you can't carry it over into the following tax year. Also, you can't put any more money in once the tax year has finished, although any income your PEP generates can be reinvested.
The structure is flexible. All PEPs have to be organised by a plan manager approved by the Inland Revenue. With some PEPs that manager will make all the investment decisions while with others you can phone the manager up and tell him or her which shares to buy and which ones to sell. It depends on how highly you rate your investment skills and how much time you have.
With the most common type of plan the manager will put your money into one or more unit or investment trusts. These are collective vehicles which pool investors' money to buy shares.
Different unit trusts are managed to achieve different aims - they might go for good capital growth, high income, focus on small companies or just make sure they own all of the shares in the FTSE 100. Most PEP managers will be able to put your money into a few different types of fund.
Some trusts are designated as non-qualifying funds because they have more than 50 per cent of their assets invested outside the UK or European Union. They are popular with investors who think they can make gains from overseas share markets. You can put only pounds 1,500 of your PEP allowance into these funds. The remaining pounds 4,500 can go into a regular qualifying fund but the investment must be made by the same PEP plan manager.
Other PEPs don't invest in equities at all. So-called corporate-bond PEPs invest in debt certificates and preference shares issued by companies. These are generally aimed at investors who want to generate income, not build up their capital. Tracker-fund PEPs, such as the one recently offered by GA Life, will try to mirror the performance of the FTSE 100 share index, or a combination of other indices, including the S&P 500 in the United States.
If you want to make use of your allowance this year, your money must be paid over by the end of the tax year on 5 April. It is not enough to simply agree to pay the money. Because this year 5 April is a Saturday, there is even less time available than normal.
But investing in a PEP is a serious business which shouldn't be rushed into at the last minute, especially for first- time investors. The undoubted tax advantages of a PEP account for nothing if, in the pre-election and pre-5 April panic, you invest in the wrong fund, which then falls through the floor. There are a lot of different PEPs available and all the options should be considered, including fund management charges. As a rule of thumb, more than 5 per cent initial charges, or annual management fees higher than 1.5 per cent, are too much.
The Independent has produced a free guide to PEPs. The 32-page guide, sponsored by GA Life, a leading life insurer, is available by calling 0500 125888 or by filling in the coupon below. Copies will take about 10 days to arrive.Reuse content