Investors looking for an easy and tax-efficient introduction to the stock market need initially look no further than a personal equity plan (PEP).According to the latest Inland Revenue figures, PEPs are growing in popularity and have accounted for over £9.25bn of investment capital since they were introduced in 1987.

Nearly three million PEPs have been purchased during this time, and in the 1992/93 tax year alone, a total of £3.12bn was invested in 910,000 plans.As interest rates have declined, building society investors have been attracted by the growth and income potential of PEPs.

This change in direction contributed to a net outflow of £521m from building society accounts during the last two months of 1993, and figures for the first two months of this year could be even higher.The greatest advantages of a PEP are that any capital growth is tax free, and income can also be withdrawn from the plan free of tax.

PEPs are therefore ideal investments for individuals paying income tax at the highest rate, and also for those who regularly exceed their annual capital gains tax exemption, which for this tax year is £5800.

PEPs can also be considered as security for mortgages, for school fees planning, or as a supplement to pension contributions.Any UK resident who is over the age of 18 can invest in a PEP.

A maximum of £6000 can be invested in a general plan each tax year, and £3000 may also be invested in a single company plan which invests in the shares of one company only.

This means that a married couple can enjoy a joint annual allowance of £18,000.As we approach 5 April 1994, PEPs are once again becoming the subject of stiff competition between innovative product providers.

Discounts and promotions are presented in a number of different guises and, in some circumstances, require careful examination of the small print.

But investors should take great care before choosing a plan, in order to decide, the over 800 plans on the market, which one is suitable.Currently, the biggest issue surrounding PEPs is charges.

Some providers are changing tack by introducing a US-style exit charging structure as opposed to making an initial charge at the outset.Exit charges are not new, and there is really no difference between this and an ordinary surrender penalty where an investor cancels an investment early.Nevertheless, such charges should be of minor importance since a PEP must be regarded as a medium to long term investment and be held for a term beyond that for which an exit charge is levied.

This is usually five years.The mistake which the majority of investors appear to make is to opt for a PEP with low charges whilst ignoring the past and possible future investment performance of funds.

Ignoring charges and with dividends reinvested, Micropal figures show that the best performing qualifying unit trust PEP over three years was Hill Samuel's UK emerging companies unit trust, which showed annualised growth of 40.62%, turning a £6000 investment into £17,077.

The worst performing PEP in the sector showed growth of 6.23%, producing only £7222.

Choosing Hill Samuel instead of the worst performing plan three years ago would therefore have been worth an extra £9856.The risks in choosing a plan can be reduced dramatically by seeking professional independent advice.

Advisers may be offering one-off fees or, more commonly, discounts for arranging PEPs.Many independent advisers use a panel of PEP providers which are tailored to clients' needs.

Because unit prices move up as well as down, and returns are not guaranteed, advisers rely upon industry figures to monitor performance for their clients.Reviews are usually conducted when annual statements are produced by the investment managers, and it is therefore well worth choosing an adviser who provides this type of service.One last point to consider is that, under current regulations, PEPs remain free of tax for life and capital which is protected from tax now will be protected in the years ahead.This is a huge advantage over other forms of equity investment, and one which may be withdrawn in the future should there be a change of government.In contrast to PEPs, save as you earn (SAYE) schemes are five-year monthly savings plans run by building societies and banks.

The advantage of SAYE is that, after five years, a tax-free bonus equal to 14 months' contributions is added to the scheme, giving an overall fixed return of 8.3% net per annum.If the scheme is held for seven years, there is a further bonus of an equal amount, providing a net return of 8.62% per annum.With such competitive returns, why are these plans relatively unknown in the retail market? The answer appears to be in the profit margins, which are relatively small compared to other products available, and, secondly the fact that the maximum allowable investment per individual is only £20 per month.One advantage with SAYE is that an initial lump sum may be deposited as a feeder account which earns taxable interest before being transferred monthly into the scheme.If the plan is terminated within the five-year period, contributions will be returned to the investor with interest at only 6% tax-free.

However, no interest is paid if contributions cease within the first 12 months.The current attraction of these schemes is apparent from the following comparison.

Basic rate taxpayers would need to find returns of 11.07% gross per annum over a five-year period or 11.49% gross per annum over the seven-year period to beat the benefits available from SAYE.For a 40% taxpayer, these figures rise to 13.8% gross and 14.37% gross respectively.

With the likelihood that interest rates will remain low in the months to come, such fixed returns should not be overlooked.