The friendly way to save

IF YOU want to make savings without risking your money on the market, a Tessa savings account is a useful part of any taxpayer's portfolio, writes Harvey Jones. It's just a tax-free bank or building society account, so your capital is never at risk.

If you only have a few pounds to invest each month, a low-risk friendly society policy is also worth considering. A friendly society will put your cash in a mix of investments such as cash, shares and government bonds. If you can leave the money untouched for 10 years, the returns are tax free.

You have until next April to open a Tessa (adults can have one account each) and the scheme runs for five years. The proceeds are tax-free if you leave savings (up to pounds 9,000) invested for the full term.

Most Tessas pay a variable rate of interest. Although several of the better deals pay 8 per cent interest at the moment, these rates are likely to fall if (as expected) the Bank of England drops interest rates later this month.

Many people are put off taking out a Tessa because they think they will have to set aside several thousand pounds right away. In fact many Tessas, including Norwich & Peterborough's account (currently paying 8.00 per cent) will accept just pounds 100 as a minimum.

Friendly societies get little publicity yet provide a low-cost option for people seeking savings policies, life cover and sickness protection. Their tax-exempt 10-year savings plans, including built-in life cover, are unavailable elsewhere.

Friendly society plans allow investors to save up to pounds 25 a month (pounds 270 for an annual lump sum). They are available from pounds 10 a month and many plans will let you save for up to 25 years. However, they should not be considered unless you can see out at least the first 10 years. This is because monthly payments are so low that a disproportionate amount is eaten up by charges, particularly in the first year. In many cases, if you stop paying in the first 12 months you get nothing back. If you stop between two and 10 years, you may incur tax on what will be a reduced amount.

So what are the rewards? A man aged 30 investing pounds 25 a month for 10 years would receive pounds 3,480 if the Family Assurance fund grew at 6 per cent a year, and pounds 4,030 if the growth rate was 9 per cent. He would also have life cover of pounds 2,250.

Saving pounds 20 a month for your child with the Liverpool Victoria would earn pounds 2,780 after 10 years tax free, assuming 6 per cent growth, and pounds 3,210 assuming 9 per cent growth.

Contacts: Norwich & Peterborough Tessa, 0800 883322; Family Assurance, 01273 724 570; Liverpool Victoria, 01202 292 333.