It's a good game, if you follow the rules

To safeguard their tax-free status, personal equity plans are subject to rules. These affect both you as an investor and where and how your money is invested.

PEPs are only available to people 18 and over who are, in the language of the Inland Revenue, "ordinarily resident in the UK for tax purposes". Since everyone has an individual PEP allowance, a married couple can each invest the maximum, but unused allowances cannot be transferred. You cannot pay into a PEP on behalf of someone else, so grandparents cannot contribute to a PEP for a child.

You will normally need to quote your National Insurance number on the application form. If you do not have a record of your NI number, you can find it on your P60 (the form showing tax and NI deductions, which your employer issues).

As a general rule 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 pounds 3,000 a year in a single-company PEP. But, and it is a big but, these limits apply only to "qualifying investments", defined as follows:

q Shares in companies that are registered in the UK or any other member state of the EU and which are quoted on a "recognised European exchange". This means your PEP can hold shares in Carrefour, the French supermarket chain, which is quoted on the Paris Bourse but not shares in Whittard of Chelsea, the tea and coffee merchant, because its shares are quoted on the Alternative Investment Market, which is not a recognised exchange.

q Single-company PEPs, which have a separate pounds 3,000 limit in addition to a general PEP, can invest only in the ordinary shares of a single EU company (excluding investment trusts).

q Bonds and loan stocks, which can be divided into three categories. Debentures are fixed interest bonds, secured on the company assets. Preference shares rank ahead of ordinary shares for repayment if a company is wound up, and again often carry a fixed dividend, while convertibles are loan stocks that can be converted into shares on a specific date some years in the future. Corporate bond PEPs must hold at least 51 per cent of their funds in such qualifying assets; the balance can be held in "non-qualifying" assets, which generally means cash, bank deposits and gilts.

Within the last few days, a fourth category of investment has been added to the list: your PEP can now invest in an Oeic (pronounced oik). This is an open-ended investment company, similar in many ways to a unit trust, but with a single price rather than a bid/offer spread.

If your PEP invests in non-qualifying assets, the maximum that you can put in during any one tax year is pounds 1,500.

The final rule is that your PEP must be operated by a licensed manager.

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