Tax Saving Survey: Caring and sharing profits

Friendly societies may not be what they were but they offer a personal approach to savings and can be good value.

Sixty years ago, friendly societies formed the backbone of Britain's welfare system, working with Government and local communities to provide financial and welfare benefits in return for contributions of a few pence a week or less.

Today, they are but a shadow of their former selves but one in 10 people still hold a friendly society plan and last year the movement paid out over pounds 800m in benefits.

In March this year there were some 289 societies still in existence, although just 118 were authorised to write new business. Between them they manage over pounds 10bn of funds. Societies are now empowered to market a wide range of savings and protection products but one of the most attractive, at least on paper, is the tax-exempt savings plans that only friendly societies can sell.

You can now invest up to pounds 25 a month, or pounds 270 a year, into a 10-year savings plan, although plans may be kept going after that, for up to 30 years. The beauty of the arrangement is that the investment fund where your premiums are invested pays no tax and the benefits are also tax free.

Tunbridge Wells Equitable Friendly Society's Baby Bond has proved particularly attractive to grandparents and others who want to build up savings for children. The pounds 25 monthly limit applies to the child and not to whoever is paying the premiums so a grandparent with four grandchildren could pay pounds 100 a month into four plans. Each grandchild would not be able to have any other tax exempt plans though.

As an alternative, some societies will take a lump sum investment that buys a temporary purchased life annuity which in turns funds the annual premiums. Royal Liver for example offers plans at pounds 1,400, pounds 1,800 or pounds 2,200.

So how do tax exempt plans compare as long-term investments? Earlier this year Planned Savings magazine looked at actual 10-year performance of a number of plans, based on the old pounds 9 a month premium limit that applied until 1995. The magazine found a wide variety of results as our table shows.

Tunbridge Wells Equitable claims that a pounds 25 a month investment maturing in January 1998 would have given a return of 11.07 per cent a year, compared to just 3.95 per cent in a typical building society account.

Callum Bennie, direct marketing manager at Scottish Friendly, says that his society came third overall in Money Management magazine's annual survey of top performing with profits funds over 10 years. It also came sixth over 15 years and has been a regular top 10 performer for some years, indicating consistency as well as good performance. Tunbridge Wells Equitable also features in the top 10 over both 10 and 25 years.

Most plans charge a monthly policy fee - pounds 1 in the case of Scottish Friendly; 80p for Tunbridge Wells Equitable, and 55p for Royal Liver - and this has a greater effect on smaller premiums than on larger ones. Annual management fees are charged on unit-linked funds, and these are typically around 1 per cent a year or more.

In addition, most funds have a 5 per cent bid/offer spread (the difference between the prices units can be bought or sold at) and there may be a reduced investment into units in the first year - Royal Liver invests just 35 per cent for example.

With profits plans may have no specific charges set out but actual running costs are likely to be similar.

Life assurance policies are notorious for having unfathomable charging structures and in practice there are two key figures to look at. First, the projected reduction in yield, which shows the effect of all the charges taken together, which is shown on the quotation or illustration form. Second, the past performance record. If you are in the market, it makes sense to take independent advice or at least to shop around and compare different plans.

What else do you get? Life cover is built in and a pounds 25 a month investment would give a sum assured of pounds 2,025 with Royal Liver for a 30-year-old man, although the sum varies depending on age. For a child, their plan would pay out a refund of premiums only, if they died before their 10th birthday.

For the future, there appear to be both clouds and blue skies on the horizon. On the downside, from next April societies will only be able to reclaim Advance Corporation Tax credits at 10 per cent on company share dividends, and only then for a further five years. The effect of that will depend on how much of the investment fund is invested in shares but a yield reduction of around 0.25 per cent a year is likely, rising to 0.5 per cent after five years.

On the plus side, nothing else offers quite the same tax advantages, although that may be offset by higher charges, partly because societies have no taxed income against which to set them, and good past performance is all-important.

For many people, there is a growing view that friendly societies hold out the hope of a more caring and personal approach to savings and welfare planning and can represent good value too.

Andy Couchman is publishing editor of `HealthCare Insurance Report'