Few realise that building societies can trace their foundation to the era of Chippendale furniture, Mozart’s compositions and art of Sir Joshua Reynolds. In fact, 19 years before George Washington became America’s inaugural President, the first society was formed.

Known as Richard Ketley’s, the first building society was established in 1775 at the Golden Cross Inn in Birmingham. Such early societies pooled members’ money to allow them to purchase land and construct houses. They were ‘terminating’, which meant they were wound up once all subscribing members had received a home. Based mainly in the Midlands and northern England, the last terminating society – the First Salisbury – was dissolved in 1980.

Merger activity
Societies stopped being ‘terminating’ once they accepted deposits from individuals who had no desire to borrow to buy a home but simply wished to invest, at which point they became known as ‘permanent’ societies.

Currently there are 55 building societies, assuming four mergers due to take place in December 2008 are completed – those between Barnsley and Yorkshire, Catholic and Chelsea, Cheshire and Nationwide and Derbyshire and Nationwide. In the
next three months, a further merger (Skipton and Scarborough) should take effect, bringing together the sixth and 17th largest building societies.

As mutual institutions, building societies are owned by their members, rather than by shareholders. Although total assets exceed £360 billion, the societies’ capital position has been weakened through the credit crunch. Several smaller societies have been shut out of the wholesale funding markets, making fresh mortgage lending virtually impossible.

In Barnsley’s case, a merger was forced by its ill-advised loans to two Icelandic banks. However, Yorkshire has made it clear that if it succeeds in retrieving the money, Barnsley members will receive an ex-gratia payment.  

Some 15 million adults in the UK have building society savings accounts and almost 2.9 million are currently buying their home with the help of a society loan.

While savings accounts and mortgage business are the twin pillars of a traditional building society, in recent times the movement has diversified into a wide range of personal financial services. The Building Societies Association (BSA) claims its members provide:

• higher rates for savings and lower rates for mortgages than banks, consistently appearing in the top best-buy tables in Moneyfacts surveys
• better service and higher customer satisfaction than other financial service providers
• lower charges since banks cost 35 per cent more through dividend payments to operate
• campaigns for the consumer such as defending free ATMs, extending higher cash ISA limit to 2010, raising stamp duty lower threshold (from £60,000 in 2005 to £120,000, now £125,000), retaining passbook accounts and ensuring minimal branch closures
• Several current banks used to be building societies (as the table on page 39 shows), ranging from Abbey National (now part of Banco Santander) to Woolwich (which was absorbed into Barclays).

Possible windfalls
Carpetbagging – securing a windfall payout for a small deposit – is still possible, but potential carpetbaggers should check the minimum investment and length of membership required and if only local residents are accepted. To discourage carpetbagging, many societies have established charity trusts and require new members to sign away any future windfall benefits to such trusts. However, some propose only a time limit, such as seven years with Chorley (Lancashire), Dudley and Principality (Cardiff).  

Just one society, Britannia, gives a loyalty bonus, which is effectively a share of the profits. Britannia is the second-largest building society with £36.8 billion assets and 2.9 million members. Its first merger was in 1938 when it took over Longton Mutual Permanent Benefit.

Perhaps spurred on by Gordon Brown’s plan to use savings languishing in dormant accounts, in the last year building societies have been making far greater efforts to reunite such money with its rightful owners. In many cases, they may have moved home and not passed on the new address, or simply forgotten an account opened as a child.

The Hanley Economic in Stoke-on-Trent has had particular success in reuniting a local deaf charity with £10,000 while Nationwide has mailed over 25,000 members with accounts unused for 15 or more years with a balance of at least £100 and reports that nearly half have been reunited with their funds.

The BSA estimates that £150 million is currently “lost” or unclaimed across 1.1 million accounts. In the first six months to end March, it calculates £20 million was reunited, based on 35,000 accounts.

Safety and savings
Is a small building society safe? Any society offers depositor protection up to £50,000 – doubled for joint accounts – through the Financial Services Compensation Scheme.
Some small societies make a point of offering better rates to savers. Stuart Young, chairman of Beverley BS with just £145 million assets, says this is ‘the time when a mutual society could, and should, absorb the cost of attracting retail funds, liquidity and customer confidence being more important than profitability.’ As a result of offering appealing rates, Beverley saw seven per cent growth on savings balances in the first four months of 2008 compared with 2.5 per cent over the same period the year before.

Building societies attracted a record £16.1 billion savings inflows in 2007, almost double the £8.3 billion inflow the previous year. While some of this boost came from money withdrawn from Northern Rock, the BSA’s director-general, Adrian Coles, ascribed a substantial amount to households preparing ‘for a more uncertain year ahead’.

ISA success
ISAs form a central part of building society savings. According to independent comparison website moneysupermarket.com, the most consistent providers of cash ISAs over the last three years, are all building societies: Kent Reliance, Yorkshire and Earl Shilton. Only one society – Nationwide – also offers a stocks and shares ISA.

Currently, it is possible to transfer a cash ISA to an equity one but not to move investment the other way. The chancellor remains deaf to calls for a change to these rules, even though two-way transfers would help both those requiring lower volatility, perhaps on age grounds, and those who move from being higher rate to standard rate taxpayers.

Watch the rates and terms with any cash ISA taken out. A top interest-paying one may suddenly fall down the list, presumably once it has taken in sufficient funds. This is particularly noticeable once a fixed-rate period expires.

It must also be said that there are still far too long delays in transferring cash ISAs from one society to another. Instead of such arrangements being made on an electronic basis, instructions to transfer are posted. The BSA, British Bankers’ Association (BBA) and Tax Incentivised Savings Association (TISA) are collaborating on new guidelines in this area.

Special arrangements
Savers who have already used their ISA allowance and dislike the uncertainty of variable rates might like to consider a building society fixed-rate bond. Leeds offers five per cent to May 2009, Nationwide has five per cent for three years, Principality eight per cent for one year, National Counties has 4.76 per cent for six months, Mansfield has 4.75 per cent for one year, Chelsea offers 4.75 per cent to June 2009 and Cheshire at the same rate for two or three years, Buckinghamshire offers 4.70 per cent until June 2009 while Stroud & Swindon have 4.70 per cent to January 2010. All these rates are for a minimum investment of £1,000, but only £1 for Nationwide and £500 for Mansfield and Principality.

Societies also offer a range of options for saving by, and on behalf of, children. Apart from Child Trust Funds (offered by 13 societies), one of the best ways to start a child on the financial ladder is to open a children’s account with a building society. However, parents should make sure an Inland Revenue form R85 is completed for any children’s account so that interest can be earned on a gross basis.

The best rates are for regular savings. Nottingham pays a fixed 7.50 per cent on £10 to £100 saved monthly for a child under 15 years, with the account held by an adult in trust for the child. There is no limit on withdrawals.

Shepshed pays 6.25 per cent on the same sum up to 18 years, but reduces the rate by 2.25 per cent if less than 11 payments or a withdrawal is made. Stroud & Swindon has a higher upper limit monthly of £250 (minimum £10) for seven to 18 year olds on which it pays 5.55 per cent.

One of the reasons for choosing a non-regular children’s account is the gift on opening. A money box is given by City of Derry, Earl Shilton, Furness, Hanley Economic, Holmesdale, Market Harborough, Monmouthshire, Principality, Saffron, Stroud & Swindon, piggy bank and discount vouchers at Dunfermline, £15 worth of Virgin vouchers at Coventry, Ronnie the Rhino toy at Leeds, choice of a teddy bear or Citybag at Melton Mowbray and a teddy bear, football or model van at Shepshed. A few societies send a birthday card (like Bath and Furness) which is a good reminder to take in any savings.

Regular savings
Putting aside some money on a monthly basis is not only a good discipline but likely to result in a more attractive rate with many building societies. Typical examples, from the latest Moneyfacts survey show 7.75 per cent  from Chorley & District, 6.55 per cent from Skipton, 6.00 per cent offered by both Chelsea and Norwich & Peterborough (both of which include a three per cent bonus for the first year) 5.85 per cent from both Teachers and Yorkshire, 5.75 per cent from Nottingham and 5.50 per cent from Cambridge.

Watch for penalties, such as if 12 payments are not made each year, or the maximum number – if any – of withdrawals that are allowed. For those with bonuses, there is no problem in closing an account at the end of such a period and starting a new one immediately.

In recent years, building societies have also developed specific savings accounts for the over 50s age group. There are now 28 societies offering such accounts. The minimum investment ranges from just £1 (Kent Reliance, Mansfield, Market Harborough, Nationwide, Newcastle, Principality) up to £10,000 (Coventry, Melton Mowbray, Saffron).
Rates on these accounts can be appealing: 5.85 per cent (Kent Reliance for 60 plus and 6.45 per cent for 65 years and older), 5.70 (Coventry for 50 plus) and 5.40 per cent (Market Harborough for 60 plus).