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.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...