Your Money: Readers' lives

The future for building societies ... PEPs ... funding retirement. Each week we answer your letters on everyday financial concerns
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You have given good advice about benefiting from the recent rash of building society windfalls. But what are the disadvantages of having no building societies in, say, five years' time?

AJ, Cardiff

First, it seems quite likely that the building society movement will still be around in five years. But it is true that most of the big societies are becoming banks or are already banks (with Birmingham Midshires the hottest tip to announce a windfall next). In fact, the lion's share of the building society movement, in terms of the number of branches and customers, will be gone by the end of next year, by which time the current rash of demutualisations will have gone through. What will be left will be mostly smaller, regional societies.

The big worry with this reorganisation is that while building society customers will gain in the short term from windfalls, they will lose out longer term.

On the face of it customers stand to lose out because a new group of people, shareholders, will want a slice of the cake in the form of dividends. Existing customers may keep their free shares and benefit from dividends, but future generations of customers will not benefit.

However, the would-be/ will-be banks argue that they still have to win over savers and borrowers in a competitive market, so customers need not lose out. What counts in terms of delivering value for money to customers is the efficiency with which a business is run and whether it can keep costs down, not its constitutional structure.

A glance at mortgage rates and the range of mortgage deals available from any single lender reveals no obvious difference between banks and building societies, though there are differences between individual institutions. That said, research carried out by the Consumers' Association shows that on average societies charged mortgage borrowers 0.2 per cent lower a year over the five years to June 1995. When it comes to savers, the evidence suggests that building societies do give better rates on average. An individual bank may have better rates than an individual building society, though.

Some building societies claim to be firmly committed to remaining mutual organisations, meaning that they are owned by their customers. In many cases they have been galvanised into offering better deals and loyalty schemes by the recent talk of windfalls. Ideally, customers should keep these remaining societies on their toes by shopping around for the best deals and turning up at annual general meetings to ask awkward questions. If the societies do deliver, customers of the Halifax, Woolwich and other converting societies should consider switching once they have received their windfalls.

I used my 1995-6 PEP allowance to invest in Southern Water shares. Now that Southern Water is being taken over I have opted to take cash. Can I transfer the cash (about pounds 6,800) into another PEP, ready to buy shares in perhaps a couple of other companies? BW, Kent

There are two important rules to bear in mind. First, if you do not like the investments you have in a PEP you can change them for other Peppable investments, provided the rules set by the plan manager allow this. Second, if you want to transfer to another PEP manager you have a right to do this.

You may want to switch to another PEP manager because you have found one that has lower charges, a wider investment choice, better performance or more efficient administration.

But transferring from one plan manager to another must be done properly. You should not simply cash in the plan and then reinvest the money elsewhere. If you do, the investment in the new plan would count as a new PEP investment, rather than as a transfer. It would mean using up your current year's PEP allowance and would be limited to pounds 6,000 (or pounds 3,000 for a single-company PEP).

In order to avoid accidentally closing your old PEP, you should ask the new plan manager to liaise with the old to effect the transfer.

Transfers usually involve charges - some levied by the old plan manager, some by the new. Sometimes you can transfer investments themselves between one manager and another. But the rules of either plan manager may dictate that you transfer cash, in which case you would first have to liquidate your investments.

I have pounds 3,000 to put away for my retirement in 20 years. Assuming that charges and fund performance are identical, would the eventual fund be greater from a pension plan or a PEP?

JS, Glasgow

In the unlikely event that both the PEP and pension have the same charges and investment performance, the pension will produce a bigger sum at retirement. But this may not translate into a better deal overall.

Both funds will benefit from tax-free growth, but the pension has the advantage of tax relief on contributions. The pension manager will be able to reclaim basic-rate tax paid by the employed to add to the fund. Higher-rate taxpayers will be able to claim extra relief, reducing the net cost of the initial contribution. (Likewise, the self-employed claim all the tax relief.)

However, the bulk of a pension fund will have to be converted into an annual pension, called an annuity, which is taxable, whereas you will be able to draw a tax-free income from the PEP. In addition, you can cash in a PEP at any time and do what you like with the money. Pensions are less flexible. So if you have already made reasonable pension provision, a PEP might be a more attractive option.

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

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