Find the right fund and then look at charges
It's obviously been a success as last year the amount of money flowing into PEPs reached almost pounds 1bn a month during the critical period before 5 April, the end of the tax year.
Two other factors helped the boom: poor-paying building society accounts led many savers to seek better returns elsewhere, and confidence in the stock market returned. But PEP managers played their ace card by introducing price cuts.
The popular Virgin Direct Tracker PEP was launched last year purely on the basis of its simplicity (it just tracks the index of the UK's biggest shares) and its lower price (an annual fee of 1 per cent).
Other PEP managers followed with similar deals. Legal & General, for instance, was quick to reduce the annual fee on its index-tracker fund to 0.5 per cent and scrapped its initial charge.
But investors flocking to take advantage of the new-style low-charge PEPs could be making an expensive mistake. There's an oft-quoted adage that you get what you pay for - and in the investment world the saying has some merit.
That is why Perpetual, the most popular PEP manager, can afford to maintain its front-end charge of 5.25 per cent: seasoned investors are prepared to pay the price for the potentially greater rewards. There are, of course, no guarantees with this kind of investment, but Perpetual's consistently good track record is attractive. In fact, Perpetual is prepared to link part of its fee to performance and will receive 10 per cent of the outperformance of its funds compared to the FT-SE All Share Index.
Performance is the key word here. But it is one that can be missed by novice investors. Their mistake is to think of PEPs in the same way as Tessas or other savings opportunities.
When it comes to investments, individuals have to make several decisions before handing over their cash. Are you prepared to take a gamble with your money in return for potentially higher rewards, or do you want to ensure that your capital is completely safe? In other words, are you cautious or aggressive when it comes to making money? Your answer will help give you an idea of what kind of PEP you should choose.
You must also consider whether you want income or growth from your investment, and whether you are investing for a particular purpose, such as the children's education or for extra money in retirement.
Once you know some basic financial facts about yourself, it's a question of marrying these with the right investment. If you are prepared to take a large risk it could be worth putting all your cash in one share, for instance. If you don't like the potential downside of that strategy but like the idea of investing in the stock market then you could choose a collective investment, such as a unit trust or investment trust. If you want to minimise the risk then you could be looking at corporate bonds or convertibles.
All these options are available through a PEP, which has simply become a tax-efficient wrapper for different forms of investment. It's the underlying investment you should be considering, not the marketing spin with which PEP managers try to dazzle you.
Having decided what kind of investment you prefer, you can look at PEP charges. It's true that if you make a mistake and pay too much in charges, it could negate the tax advantages of having the PEP in the first place.
But five years down the line, you could regret going for the cheaper option - and missing out on the opportunities offered by the more expensive specialist funds.
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