The situation for PEPs changes from April 2008, when "All PEP accounts will automatically become a stocks and shares ISA." (quoted from http://www.hmrc.gov.uk/isa/rule-change-april08.htm). The change in rules means that interest on cash held in PEPs will, from April, be subject to the same 20% charge as is currently levied on ISAs. Here are the relevant quotes:
The change is explicitly spelt out in this extract from http://www.hmrc.gov.uk/isa/rule-change-april08.htm:
Q. So from now on how will the interest I receive from any un-invested cash held in my former PEP be treated?
A. The ISA manager must deduct a flat rate 20 per cent charge and pay it to HM Revenue & Customs. This rule has always applied to stocks and shares ISAs and will now apply to interest earned on uninvested cash formerly held in PEPs.
The 20% rule about ISAs, and the fact that you don't have to declare the interest, is explained in this extract from http://www.hmrc.gov.uk/isa/faqs.htm#24:
Holding cash in the stocks and shares component
Cash may only be held in the stocks and shares component of ISAs to invest in qualifying stocks and shares. This includes cash subscriptions, interest and dividends, and proceeds from disposals of qualifying investments which have not yet been reinvested.
The ISA manager may pay interest on this cash while it is held in the account. There is no income tax to pay on this interest, but the manager by law must deduct a flat rate 20% charge before crediting it to the account. You do not have to declare this interest on a tax return.