The hefty price we pay for a little peace of mind

Buying a washing machine comes low on most people's list of favourite weekend outings. And the experience is made even worse when sales assistants push their extended warranties.

Retailers make around pounds 400m a year from selling warranties on goods from vacuum cleaners to televisions to hi-fis. White goods - fridges, freezers, washing machines and dishwashers - are the largest source of warranty sales, and also the most expensive items to cover.

According to TSB, which launched its own breakdown cover for electrical appliances late last year, the most feared domestic catastrophe is a failed washing machine. But consumer groups believe such fears are largely ill- founded. Modern domestic appliances are highly reliable, and even retailers that sell a significant number of extended warranties admit that peace of mind is what customers are really buying.

"Some people are risk-averse," says Steve O'Brien, spokesman for the Dixons group, which also includes PC World and Currys. "They want the confidence of not being landed with a heavy bill."

Retailers have been criticised for the way they sell extended warranties. Buyers have complained of little choice and pressure- selling techniques, and the Office of Fair Trading (OFT) has warned in the past that extended warranties were over-priced. Despite the introduction of a voluntary code of practice by the British Retail Consortium, the OFT said last month that although prices had fallen and shops were giving more information to customers before they signed, there was still room for improvement.

Most extended warranties are, in fact, insurance policies. And like any insurance policy the size of the premium is based on the risk. Anyone thinking about a policy needs to weigh up the risk of paying for a repair out of their own pockets against the cost of an extended warranty. The policies are not cheap: four years' extra cover (beyond the manufacturer's own one year of cover) on a Candy washing machine from Currys is pounds 172.

Both the Consumers' Association and the OFT believe that customers can be better off carrying the risk themselves. As the OFT said in its annual review of the market last month: "In most cases extended warranties are still significantly more expensive than the likely cost of repairs over the warranty period."

Changes to the Insurance Premium Tax (IPT) levied on extended warranties will do little to make them more attractive. From this month, warranties sold with a product attract IPT at 17.5 per cent. This compares with the 4 per cent levied on insurance policies sold separately.

The Chancellor's intention in raising IPT was to stop retailers avoiding VAT by reducing the price of the goods and increasing the cost of the warranty, which did not attract VAT. By matching the two rates, the Government hopes to maximise its revenues. For consumers, the result is that an expensive purchase becomes more expensive still.

The large retailers, including Dixons and Comet, plan to absorb some of the cost of the tax themselves. "We think it is an unfair tax," says Dixons' Mr O'Brien. "We do not sell warranties and products as a combined package; there is no ability for us to value-switch."

The tax rise may yet achieve what an OFT investigation and consumer criticism has not: opening up the warranty market to full competition. Buying a warranty with a product is convenient but the manufacturer, or a third- party insurer, might have a better deal. They might also be able to cover all major appliances for one premium, and have one phone line for repairs regardless of the make or where the appliance was bought.

This is the approach adopted by Norwich Union Direct, which launched its Ultimate Appliance Breakdown Cover last July. One premium of pounds 7.95 a month covers all major kitchen appliances, as well as the hi-fi, TV and video recorder. People with problems phone Norwich Union, which arranges for the repair and settles the bill.

TSB's policy charges a set monthly amount per appliance: a two-year-old washing machine costs pounds 4.57, and a small or medium-sized TV of the same age is pounds 2.03.

"People are learning to shop around," says Lindsay Addison, of the specialist insurer Domestic & General, which runs policies for manufacturers such as AEG as well as selling direct. "Consumers are pricing up policies from the retailers and also seeing what the manufacturer offers."

Still, the trickle of new insurers offering warranties is far from a flood.

Barclays examined the market last year, but as yet it has not launched a product. And Norwich Union admits the going is proving tougher than it thought. "We believe there is a gap in the market, and the market is not well served by current products," says spokesman James Dufell. "But it is difficult to get people to buy it [the policy].

"People selling products have a hold on the consumer. We are not finding it as easy as we had originally hoped."