I ONLY use raw because going out and taking pics on a digital camera then post-processing is the equivalent of taking old analogue film into a darkroom and completing the job IMO.
JPEG is ok for quick results where you 'got it right' in the camera, but if you want to be able to correct white balance, under/over exposure etc, then you have to go raw.
To answer your question, if I were you, I'd go for something like the Canon EOS 550D. The 550D is a very popular "entry level" DSLR and has 18MP, you can get one S/H for around £400. The lens is the important bit though, if you want to make good portraits, you will have to lash out on a decent lens like Canon's 50mm 1.4, or the cheapy nasty (but optically fairly good) 50mm 1.8, if budget was an issue.
I back up what VHG says about getting hung up on megapixels except when you need to enlarge a print.