So are you sure you're a PEP kind of person?

Consider the state of your finances before you take the plunge

Should you have a PEP?

As so often with personal finance, the answer is that it all depends on your circumstances. Before making your decision, answer the following key questions.

Do you expect to pay income tax - at least at the standard rate - for the next five years or more?

If not, stop right here. Since the whole point of a PEP is that it is a tax-saving "wrapper" for an underlying investment, there's not much point in having one if you don't pay tax. Any other form of unit or investment trust is suitable, from the tax point of view.

Do you have any cash put away for a rainy day?

Because a PEP is a long-term investment, it should not be used as a source of emergency funds. If you needed cash in a hurry, and had to sell out of your PEP, it could mean selling at a loss. Cash for a rainy day belongs in a savings account.

A good tip is to add up your total monthly outgoings - housekeeping, rent or mortgage payments and all your other bills - and then double the total. That's your safety net, or as one person has described it, "drop- dead money" - for the day she tells the boss where to go (or something more dramatic) and finds herself suddenly out of work without severance pay.

Are you in debt?

If you are regularly overdrawn, or have long outstanding balances on credit or store cards with high interest charges, it is probably more sensible to clear, or at least greatly reduce, those commitments before investing in a PEP.

Do you understand the concept of risk?

On every PEP brochure and application form you will find the "wealth warning" - a statement on these lines: "Past performance is not necessarily a guide to the future. Remember that the value of investments may fall as well as rise and therefore you may not get back the full amount you invest."

Read that again, slowly. Our friend Bill was triumphant that his pounds 1,000 investment had grown to pounds 27,000 - but because stock market prices fluctuate, if he had sold at the wrong time he might have had to settle for a weekend on the Costa rather than a cruise on the Canberra.

Do you want to invest a lump sum or monthly savings?

An increasing number of PEPs are set up to attract regular monthly savings, with payment by direct debit, usually pounds 25 or pounds 50. But read the small print to check the flexibility of your choice of plan before you sign up. Some plans limit the number of times you can change the amount you pay - claiming that this saves administration costs.

Do you already have some shares or unit trusts that are not held in a PEP?

Consider transferring your holdings into a PEP to benefit from the tax shelter - but check the charges first so that you know how much the operation will cost. If you have already done several share deals in the current year, you may be liable to capital gains tax.

Are you looking for low-risk income?

Consider corporate bond PEPs. These invest in bonds, which are generally safer and less volatile than shares and deliver a regular income.

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