Even so, if recent financial surveys are to be believed, the majority of the British public is still unsure of the benefits of PEPs, what the rules governing investment into them are and how to go about finding a good PEP provider. Many of these issues are discussed in more depth in our survey. Here are the answers to some key questions about PEPs.
A PEP is basically a tax-free wrapper which can be placed around certain types of investments, such as shares, unit trusts and investment trusts. Any income or gains from PEP investments are tax free, and over the years these tax benefits can be worth hundreds of pounds.
You can invest up to pounds 6,000 a year in a general PEP and you must invest through a PEP manager. You can only have one general PEP per year, although it is possible to transfer out of one PEP and into another during the same year.
A general PEP can be managed or self-select. With a managed PEP, the PEP manager makes all the investment decisions for you. With a self-select PEP you decide what investments are in your PEP and you manage them. The vast majority of investors are better off spreading their risk and investing in a whole range of shares - this way you are not relying on just one or two companies to do well.
The best way to do this is through a collective investment such as a unit trust or investment trust. With these investments your money is pooled with money from hundreds of other investors and used to buy shares in a whole range of companies across many industries. The funds are run by experienced investment managers who can make expert decisions on which companies to invest in.
Many unit trust and investment trust houses act as PEP managers and offer access to their funds through a PEP. Competition is such that often it is cheaper to invest in a fund via a PEP than to invest direct.
Unit trust PEPs are the most common. You buy units in the trust, each of which reflects the actual value of its share in the underlying assets in the fund. When you want to cash in your investment, you simply sell the units back to the fund manager. Unit trust managers charge an initial fee and an annual fee for managing the fund to cover research and dealing costs, plus commission to whoever sold you the plan.
Investment trusts work in much the same way as unit trusts, except you buy shares rather than units in the fund and these are quoted on the Stock Exchange. This means the price of investment trust shares is determined by demand and supply for the shares rather than simply mirroring the value of the underlying assets in the fund.
When an investment trust's shares are quoted at less than the actual value of the underlying assets in the fund, the trust is said to be trading at a discount. Where the reverse occurs, the shares are said to be trading at a premium.
"Currently, the average investment trust is trading at a discount of 12 per cent," says Annabel Brodie-Smith, of the Association of Investment Trust Companies (AITC).
"This means the investor can buy 100p worth of assets for only 88p. However, you must then look at the other important indicators like past performance, price history, the track record of the management and the investment policy of the trust."
The investment trust industry has begun taking steps to narrow discounts. If this works and investment trust share prices start to rise to more closely reflect the underlying value of their assets, investors clearly will benefit.
If you are interested in investing in investment trust shares but are worried you may choose a fund that performs poorly, many investment houses, including Exeter Fund Managers, Gartmore, and Henderson now offer the option of spreading risk by investing in a wider range of their PEPable funds.
For those who like the idea of spreading their PEP investment over a range of funds, but would prefer to invest in unit trusts rather than investment trusts, it is worth considering a "fund of funds". These buy units in a whole range of unit trusts, usually managed by the same investment house, so diluting the risk of being invested in just one unit trust which turns out to be a poor performer.
"But while there is no danger of these funds being the worst performers, they will also never be top of the pops either," points out Don Clark, managing director of Wolverhampton-based independent financial advisers, Torquil Clark. "These unit trusts give greater diversity but they also can be a recipe for mediocrity," he warns.
If you like the idea of investing across several funds but would like to choose the funds yourself, Skandia's MultiPEP could be the answer. This allows you to invest in a range of unit trusts but they all are sheltered in the one PEP.
You can choose from 76 funds offered by 17 different fund management groups. Minimum investment is pounds 500 into each fund. But the catch to watch out for, however, is the charges. As well as paying the unit trusts' initial and annual fees, you also have to pay Skandia 0.75 per cent for managing the PEP.
The AITC has produced a free fact sheet on investment trust PEPs, available by calling 0171-431 5222. For a free guide to unit trust PEPs contact the Association of Unit Trust and Investment Funds on 0181-207 1361.Reuse content