The benefits of turning a windfall into a PEP; READERS' LIVES

Through a combination of good fortune and acting on the advice of this newspaper, I stand to benefit from several building society conversions, including Alliance & Leicester, Woolwich and Halifax. Would it be in my interest to transfer the forthcoming windfalls into a self-select PEP or is there possibly a better way to hold the shares?

SS, Manchester

Placing your free shares in a PEP is a good move in terms of tax efficiency. You'll pay no income tax on the dividend income and no capital gains tax on the profit you make when you come to sell the shares.

But PEPping the shares makes sense only if the tax you save is more than the costs of holding the shares in a PEP. Unfortunately, self-select PEPs, which allow investors to hold shares and other qualifying investments of their choice, tend to have the highest PEP charges.

The cheapest PEPs tend to be those sponsored by individual companies. They are designed to hold that company's shares only, not a portfolio of several shares. You can open only two PEPs each year - a "general" PEP and a "single company" PEP, both of which varieties can be low-cost, company-sponsored PEPs. But opting for this low-cost variety may well limit you to PEPping just two shares.

Your best course of action is to wait until you get your first set of free shares and look for the best deals available. There will be PEPs on the market designed specifically for the millions of people receiving free shares as a result of building society conversions.

You cannot transfer existing investments into a PEP without first selling them and buying them back through a PEP. But in the case of newly issued shares, you have 42 days from issue during which you can transfer them directly into a PEP.

Note, too, that since you will be acquiring the shares free, they will not count towards the normal PEP annual investment limits of pounds 6,000 for a general PEP and pounds 3,000 for a single-company PEP. So potentially you could take out pounds 9,000 of other PEPs from April and add the free shares on top.

A number of big investment managers have specifically said they will accept free shares into their PEPs. In some cases you will be able to continue holding the shares. In others you will have to exchange the shares for unit trust investments.

I have read about new-style assured short-hold tenancies. I have a house that is being let. The prospect of being able to offset mortgage interest against my tax bill is very attractive. Will assured short-hold tenancies meant that building societies cease to charge commercial rates for landlords?

AF, Cardiff

First, assured short-hold tenancies are not new. They were introduced in the 1988 Housing Act. Last year, the 1996 Housing Act amended the original legislation in a way that lessens the risk to landlords of accidentally creating assured tenancies, which give tenants more protection than assured short-hold tenancies. The changes take effect from 28 February this year.

But the rules on setting mortgage interest against your rental income are not affected by changes to the rules on assured short-hold tenancies. Basically, you can deduct mortgage interest, along with other allowable expenses you incur as a result of letting property, from the rent you receive.

Mortgage lenders vary in their policies on the rates they charge borrowers who let out property, but the 1996 Housing Act is unlikely to have any effect on what you are charged.

We have some money maturing from National Savings taken out for our two daughters, now 20 and 16. We are thinking of reinvesting the money for the younger daughter in a five-year National Savings Certificate. But the elder daughter could need her money within a year or two if, for example, she wanted to buy a car. What is best for her?

RS, Worcestershire

Fixed-rate National Savings Certificates are currently paying a guaranteed 5.35 per cent (tax-free) a year, provided you don't cash them in within five years. But you may want to consider Capital Bonds for your younger daughter. These pay 6.65 per cent fixed for five years. The interest is taxable, though this won't affect your daughter assuming she is a non- taxpayer.

For your elder daughter you could consider National Savings First Option bonds. The rate is fixed for one year at a time. It is currently 6 per cent (6.25 per cent on investments of pounds 20,000 and over). Interest is taxable unless your daughter is a non-taxpayer. You should compare these investments with the fixed rates on offer from banks and building societies in our best savings rates table on page 16.

However, speculation that interest rates will go up after the election means there is a danger that you could lose out by locking into a fixed rate now.

Some instant access postal accounts also pay quite healthy variable rates of interest. One of these could also be suitable for your elder daughter.

q Write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a telephone number.

Do not enclose SAEs or any documents that you wish to be returned. We cannot give personal replies or guarantee to answer every letter we receive. We accept no legal responsibility for advice.