ISAs vs Peps: What You Need To Know

POSTED ON Tuesday, 01 December, 2020

You want to put your money to work in an efficient way – you’ve heard the terms ‘ISAs’ and ‘Peps’ thrown around – but what are they, and what do you need to know about each of them? We’ve got the lowdown, broken down for you here in this blog. 

What is a “Pep”?

‘Pep’ stands for ‘Personal Equity Plan’; these were a form of tax-efficient investment account which were available for UK residents in the 1980s-1990s.

They were permitted to contain collective investments (e.g. unit trusts) and money invested in those were protected from tax (specifically, capital gains tax).

No new contributions can be made into PEPs currently, following the introduction of ISAs in 1999 – so if you want to open one, I’m afraid you’re out of luck, as it’s no longer possible. Instead, you should look to put your money into an ISA.

What is an ISA?

‘ISA’ stands for individual savings account. These were introduced in 1999, by then-Prime Minister Gordon Brown.

They were designed to replace PEPS, and differed in that they offered a variety of choice within these accounts. Unlike PEPs, ISAs allow you to put your money into Cash and Investments alike, rather than restricting options to just investments.

ISAs are a tax-efficient wrapper into which you can put your money to gain returns either from interest or investment, which are not subject to capital gains tax or income tax.

ISAs were introduced to replace PEPs, but there are some key differences – the main being that ISAs offer a lot more variety about where you can put your money, as there are a wide variety of different ISA types.

What types of ISAs can I have?

There are a variety of different ISA types, including…

  1. Cash ISAs
  2. Investment ISAs
  3. Lifetime ISAs
  4. Peer to Peer ISAs
  5. Junior ISAs

And within these, these are sub-types of ISAs. For example:

Cash ISA Sub-types:

  1. Instant Access Cash ISA
  2. Fixed Rate Cash ISAs
  3. 1 Year Fixed Rate Cash ISAs
  4. 2 Year Fixed Rate Cash ISAs
  5. 3 Year Fixed Rate Cash ISAs
  6. 5 Year Fixed Rate Cash ISAs
  7. Structured Growth Cash ISAs

Investment ISA types:

  1. Ethical ISAs
  2. ETF ISAs
  3. Fund Supermarket ISAs
  4. High Income ISAs
  5. Gold ISAs
  6. Index Tracker ISAs
  7. Share Dealing ISAs
  8. Structured Growth ISAs
  9. Technology Stocks and Shares ISAs

How much can I put in an ISA?

Every year, there is a government-legislated amount that you can put into an ISA which is known as your ISA allowance. The tax year runs from April 6th to April 5th each year, which is known as a ‘tax year’.

For the tax year 2020/2021, the ISA allowance is £20,000.

You can choose to put all of this into one type of ISA, or you can spread this allowance across a variety of ISA types.

But for some ISA types there are limits on how much you can put in each tax year. For example, you cannot put more than £4000 into a Lifetime ISA each tax year, and £9000 into a Junior ISA. You also cannot open more than one Investment ISA each tax year.

Lots of ISAs are very useful in saving for different purposes so it’s good to make sure you’ve researched each ISA type before you make a decision about which one is right for you. Read our ISAs Explained page for more information.