READERS' LIVES : You need time to take stock

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WE have pounds 10,000 in a building society, which we hope to use as a deposit on a house in two years' time when my husband leaves the #armed forces. Is a building society account the best place for this money?

TS, Hampshire

You have been looking at the UK and other countries' booming stock markets and wondering how much more money you would now have for a deposit on your new home if you had already invested in a PEP.

Another two years on from now and with the benefit of hindsight, you may well wish you had been more adventurous. But conventional investment wisdom says you should invest on the stock market only if you can tie up your money for at least five years.

Two years is too short for stock market investment. For one, you have to recoup the costs of investing in the stock market in that time which, depending on the PEP you choose, can amount to a few per cent of the value of your savings. In addition the stock market could take a dip and may not have recovered by the time you need your money. You should stick to deposit accounts from banks and building societies. But just because you are happy to leave this money untouched for two years does not mean you should plump for a two-year fixed-rate bond. True, this would give you a known return and something of a premium rate. But with interest rates on the rise and plenty of jockeying for position among banks and building societies you may well be better off sticking with a variable- rate account so that you can switch if something better comes along. See opposite for our Best Savings Rates table.

Britannia Life has recently notified me of the 1996 bonuses on a low- cost endowment policy that I took out in 1978 to enable me to repay a mortgage. I am dismayed at the bonuses it is giving: 2.1 per cent on the "sum assured" and 3.6 per cent on existing bonuses. The stock market has been booming and I can obtain 5.75 per cent on a deposit of pounds 1 in my Sainsbury's bank account. Why are Britannia's bonuses low?

RH Essex

Your bonus statement should probably be taken with a large pinch of salt. The point about these annual (reversionary) bonuses is that once given, they cannot be taken away. For this reason life insurance companies are cautious in the guarantees they give and therefore the liabilities they build up.

That said, Britannia has been reducing rates of annual bonuses in recent years. At the same time, however, it has increased terminal bonuses, which are declared when your policy matures, and it is the terminal bonus that makes all the difference. If your 25-year policy had matured this year you would have found that 40 per cent of the entire proceeds came from the terminal bonus.

The thinking behind reducing annual bonuses and increasing terminal bonuses is that it reduces an insurer's long-term liabilities, which allows it to reduce the amount of money it has to tie up in fixed-interest securities in order to meet those liabilities and frees up more money to invest in higher risk assets, such as shares and property. Overall, this should benefit policyholders. Taking these higher risks should bring higher rewards and the returns paid out on maturing policies should be greater.

The original concept behind the with-profits policy was that you built up your investment pot steadily. Bonuses did not reflect the full returns in good investment years but were over-generous in bad years. With so much now depending on the terminal bonus, your annual bonuses give little clue as to what your policy is really worth.

You are no doubt looking more closely at your guaranteed bonuses as the maturity of your policy gets closer and you wonder whether your policy has (or will have) acquired sufficient value to pay off your mortgage. But note that whatever the current guaranteed value of your policy, this guarantee assumes you will continue to pay the premiums for the full term of the policy. There is no guarantee if you cash in early.

Write to Steve Lodge, 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 any advice given.

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