Investment for the informed

Think carefully before answering the following questions. Are you likely to add to your windfall with other savings over the next couple of years? Do you understand the risks and rewards of the stock market?

If you answered yes to both the above, you might want to look at investment trusts. The most important thing to remember about investment trusts is that, despite their name, they are not trusts at all, but companies listed on the Stock Exchange. They operate in exactly the same way as any other quoted company except that instead of making shampoo or sausages their business is investing in other businesses.

The range of potential investments is much broader than with unit trusts and can include unquoted companies, property and even commodities. You put your money into an investment trust by buying its shares and since there is a fixed number of shares in existence, prices are determined by supply and demand. The shares often trade below the company's net asset value, and this difference is known as the discount on the underlying value of the portfolio. These discounts have widened over the past couple of years and could get larger.

Many investment trust management groups operate personal equity plans. One of the best for sheltering windfall shares is the self-select PEP operated by Dundee-based Alliance Trust.

The Alliance PEP will accept windfall shares for only pounds 10.50 to cover administrative costs with no minimum on the number of securities that can transferred into it. The only condition is that you must buy at least pounds 750 worth of shares in either the pounds 1.4bn Alliance Trust, quoted at around 2,688p, or Second Alliance Trust with assets of more than pounds 400m, both on discounts of nearly 16 per cent.

Both have similar portfolios, aiming to provide steady long- term growth of capital and income, but Inland Revenue rules mean you cannot put more than pounds 1,500 into either of these shares because they invest more than half their assets outside Europe.

To top up your PEP to the maximum of pounds 6,000, Alliance allows you to choose from a list of around 80 qualifying investment trusts and virtually any of the FTSE 350 constituents, the largest 350 companies on the stock market.

Alliance offers no advice so its PEP plan is suitable only for informed investors. To keep costs low, it tries to buy and sell shares on its list just once a week.

Charges are pounds 1 plus 0.5 per cent stamp duty and 0.15 per cent for stockbroker's commission for purchasing Alliance or Second Alliance shares. To buy stock in the qualifying trusts and companies on its list costs pounds 25 plus stamp duty and commission. Sales cost pounds 25 plus commission. In the case of Alliance and Second Alliance, the managers make an annual charge of under 0.2 per cent taken out of income and dividends are normally reinvested.

"Our PEP lies between a managed fund plan and a stockbroker's PEP," says Gavin Suggett, managing director of Alliance. He points out that the Alliance PEP is designed for long-term investors who know what they are doing and who will hold the plan for more than five years, not for someone just wanting a home for their windfall shares.

Tony Lyons and Ken Welsby