A corporate bond PEP is a less risky idea and sticks your money into company bonds instead of shares. A bond is an IOU note issued by large companies to raise cash. You give them pounds 100 for the bond and they repay interest every year until the bond expires. Then the investors get their pounds 100 back. Some corporate bond funds also invest in shares (equities).
Forthcoming tax changes will make shares less tax efficient, especially for those who need to take an income from their PEP. Corporate bond income will be unaffected.
You can pay a lump sum (up to pounds 6,000 this year) into a general PEP or make a monthly payment of pounds 20 upwards. Your money goes into a collective fund which pools investors' cash.
In a PEP you get a better spread of shares than you would be able to afford on your own. And you don't have to think too hard about how your investments are doing. The fund manager makes money from the fees it charges people for looking after their investments and managing the paperwork.
Think of a PEP as the wrapper on a chocolate bar. When you take it off, you are left with the underlying unit or investment trust fund (or open-ended fund, called an Oeic). You can buy into these funds outside a PEP and get exactly the same deal - without the tax breaks.
We each have an extra pounds 3,000 PEP allowance that can be used to buy shares in one company, which can then be Pepped.
This is the last tax year when any PEP investments are allowed. From April we will be able to buy an individual savings account (ISA) which looks (and is) almost the same as a PEP. The only difference is the savings limits. At the moment you can put pounds 6,000 in a general PEP each year, plus pounds 3,000 in a single-company PEP. In the tax year 1999/2000 we will be able to put pounds 7,000 into a stock market ISA. But it's only pounds 5,000 a year after that.
If you use up all your tax-free ISA allowance on your "wannabe PEP" investments, you will lose the chance to keep some cash in a bank or building society, tax free. The pounds 7,000 (pounds 5,000 from 2000 onwards) is an overall limit for your ISA investment for the whole tax year. So in April 1999 you could put pounds 4,000 into a stock market ISA and still have a pounds 3,000 allowance for your building society ISA savings account. Or you could stick the whole pounds 7,000 into shares or corporate bond funds.
A wider range of foreign funds will be eligible for ISAs. At the moment only UK and European shares qualify for a full PEP allowance. ISAs will accept shares from anywhere in the world.
After April 2000 you will have a pounds 5,000 annual ISA allowance but only pounds 1,000 of that can go into an ISA savings account at the bank or building society. So you could put pounds 4,000 into the stock market ISA and pounds 1,000 in a savings account. PEP fans will prefer to buy a stock market ISA with the full pounds 5,000.
Still confused? There are lots of free guides around from firms with an interest in selling you ISAs: Virgin Direct, 0800 9179797; Midland, 0800 180180; M&G, 0990 559900.
All your PEP investments will continue to grow after next April and you won't have to pay tax on them. You can also switch your PEPs around between providers after April. This "switching" is going to be big business for managers who want us to consolidate all our PEP investments in one place.