An Irish Times guide to the world of personal finance.

Not that long ago talk of PIPs and PEPs would have evoked images of citrus fruits and restorative tonics. Not any more. In today's world of increasingly diverse finance, PIPs and PEPs have become two of the fastest-growing savings options in the Irish market.

But just what is a PIP, or a PEP for that matter, and what makes them an attractive option for savers? Personal Investment Plans (PIPs) and Personal Equity Plans (PEPs) are essentially life assurance plans with the emphasis on investment rather than life cover. Where they differ is that PIPs are invested in managed unit funds with a reasonably broad mix of government bonds, shares and cash, while PEPs concentrate on investments in the stock market, particularly the domestic market for which they receive certain tax advantages. In addition, there are certain restrictions on how PEPs are invested. At least 55 per cent of the funds must be invested in Irish equities; of this amount, 10 per cent must be invested in smaller companies.

What is in it for the investor?

PIPS and PEPS give access to the markets for relatively small investors through managed funds.

They differ from other life assurance investments in that they have a transparent charge structure on an ongoing basis rather than the front-loading sometimes evidenced elsewhere.

There is immediate allocation of funds to investment units.

There is immediate access to invested funds at any time without penalty. The only costs incurred will be the ongoing management charges and the bid/offer spread charges the difference between the cost of buying and selling units with your investment.

However, it is important to note that both PIPs and PEPs are unit-linked and are geared for longer-term investment typically a minimum of three to five years rather than as an alternative to a bank deposit account.

How do they differ?

While they have a lot in common, there are important differences between PIPs and PEPs. These can be grouped under three headings tax, Revenue Commissioner limits and risk.

While some tax is payable on both products, there is no personal tax liability. Tax on growth in the funds is paid from the funds and reflected in the yield. In the case of PIPs, the tax rate is 26 per cent. PEPs have the advantage of paying tax at only 10 per cent on the return of the fund in recognition of the belief that PEPs help the indigenous economy by promoting investment in Irish equities.

The Revenue lays down limits on investment within PEPs. These state that investors must be over 18 years of age; they cannot hold funds in special portfolio investment accounts, special investment unit trusts or special investment policies (essentially other PEPs) and can only invest a total of £75,000 in PEPs and Special Savings Accounts, which also attract lower rates of tax; and joint investors must be married. PEPs, due to their reliance on equity investment, are a more risky investment as the last fortnight's roller-coaster ride on world stock markets has shown. At the same time, they have proved the more profitable since their arrival because of both their favourable tax treatment and the bull market which has seen stock market values rise.

No guarantees

While both PIPs and, more especially, PEPs have performed well since they came on the market in the last 18 months, they carry no guarantees. Most importantly for the cautious investor, the capital invested itself is not guaranteed. Having said that, they have proved enormously popular in an atmosphere where low interest rates and increasingly discerning investors have encouraged people to return to unit-linked investments. ee for people interested in moving into long-term savings with relatively modest premiums.

Both PIPs and PEPs can be funded through either regular monthly premiums or once-off single premiums.

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