Conal Gregory: The friendly way to help your savings grow... and is tax-free

Welcome to the world of the friendly society which is still surprisingly little known despite the first one dating from 1555 in Leith, near Edinburgh. The early societies were created to fund a funeral and help sailors in their old age as well as their families if they should be drowned at sea.

A subsequent wave of societies was established in the Industrial Revolution to assist those working in factories and mines who were injured or killed.

Today these forerunners of the welfare state number 69 but only 31 are active in financial services. Their assets total £26.4bn.

The largest is LV=, formerly called Liverpool Victoria, but after 123 years it plans to change its legal status to become a not-for-profit entity. This will be a similar structure to Bupa, known as a company limited by guarantee, to maintain its mutual status.

For peace of mind, friendly societies are authorised by the Prudential Regulation Authority which also regulates them with the Financial Conduct Authority. In the most unlikely scenario there was a problem, they belong to the Financial Services Compensation Scheme. Membership benefits, which are discretionary, are not regulated.

Friendlies offer long-term products, which can run for decades. They are not suited for those who need cash out at an early stage. There are penalties for such withdrawals which may mean less is refunded than has been paid in during the first year or so.

Most savings are invested in a with-profits fund which seeks a balanced return of income and capital growth and are low to medium risk. Look for diversity with a fair proportion of equities, both UK and non-UK, and fixed interest.

Property forms a significant part with both Kingston Unity (23 per cent) and Sheffield Mutual (41.6 per cent). This is largely in commercial bricks and mortar although Sheffield Mutual also invests in Schroders UK Property fund.

The Odd Fellows, now trading as Unity Mutual, has 63 per cent in domestic property.

Sheffield Mutual owns over 40 properties nationwide which range up to £3.3m. Recent acquisitions include a hotel in Huddersfield, tenanted by Travelodge, and a retail development in Manchester, tenanted by M&S and Barnardo’s. Usually annual bonuses are declared and added to the value of policies which can be further enhanced by a final bonus at maturity.

A few societies restrict membership on occupational grounds such as Civil Service Healthcare for the public sector, Dentists’ Provident and Police Mutual Assurance.

The tax-exempt savings plan (or TESP) is quite separate from an ISA, SIPP or other vehicle. It encourages the habit of saving although the tax-exempt element is restricted to £25 monthly or £270 annually and curiously the figures do not equate.

Many societies permit lower sums to be saved. Impressive returns can be built up with longer terms, such as up to 30 years with Kingston Unity. Rather than maturing at 18 years like a Junior ISA, a friendly society plan could run until the policyholder is 25 years or more. A guaranteed lump sum is calculated at the start of the plan which is paid upon maturity but it is highly likely to achieve more through bonuses which, once added, cannot be removed.

Providers decide on how young they will take policyholders. Some accept as babies, such as Compass, Healthy, Kingston Unity, One Family, Red Rose, Sheffield Mutual and Unity Mutual. The maximum age to commence also varies with the lowest at 55 (Healthy and Scottish) and 60 years (Unity Mutual).

To gain the best return, opt for a TESP without life cover which is likely to be only the sum assured plus any bonuses declared up to the death.

If a society is paying commission to an adviser or broker, the return can be distinctly different.

Purchased directly, a 10-year policy with Compass earned 4.6 per cent annually but reduced to 3.81 per cent if commission was paid. Their investments are unitised and not on a with-profits basis.

Discretionary benefits form a major attraction for supporting a friendly. In addition, several offer social events through branches, still often termed lodges. Foresters, for example, offers around £1m in discretionary grants via 189 branches with dental and optical help and up to £1,000 for children in need, such as where one parent is disabled.

Compass started in 1995 and has absorbed Sons of Temperance. Its fund for the 218 members has the highest proportion of any society in equities (53 per cent in UK and 34 per cent non-UK) which is invested in Newton UK Equity and Newton Multi-Asset Growth.

Foresters dates from 1834 and has built up £280m assets. For a non-life TESP over a decade, it paid an annual 2.7 per cent whilst Wakefield-based Kingston Unity secured 4.62 per cent (4.54 per cent with life cover).

Led by Ben Pears, the society has 99,695 members and assets over £110m.

OneFamily is the trading name for Family Assurance, which absorbed Harrogate-based Engage Mutual three years ago. Life cover is automatic. Funds are unitised and therefore do not pay bonuses. A TESP on the same basis as others realised £3,694 which is an annual 3.8 per cent return.

Scottish, dating from 1862, absorbed Britain’s oldest registered company, Marine & General Mutual, in 2015 and Scottish Legal Life in 2007. It paid 3.9 per cent annually on a 10-year TESP.

Sheffield Mutual has had several name changes since its foundation in 1892 as the Sheffield Equalised Independent Druids.

After a year’s membership, dental and optical benefits can be claimed bi-annually with a minimum £10 plus £1 for every £20 annual premium up to £30 payment. It will also send a £50 M&S or Love2shop gift card for each new member introduced to both the existing and new policyholders.

Unity Mutual is the new name for the Independent Order of Odd Fellows, which was established in 1810. A decade ago its TESP had a guaranteed six per cent annual bonus but currently new policies are paying 1.5 per cent. It took over Druids Sheffield in 2015.

Aside from a TESP, many societies offer regular savings schemes (monthly and annual), investment bonds and ISAs. Some have Junior ISAs.

Red Rose recently launched the first Sharia-compliant stocks and shares ISA. With bonds, it is usually possible to withdraw up to five per cent of the initial investment annually without a tax liability.

Income protection is vital to those who wish to maintain their lifestyle upon suffering an accident or in other ways are unable to continue in their chosen employment.

Friendlies like Cirencester, Dentists’ Provident, Exeter and Holloway offer policies both with and without a small savings element. They can be keenly priced. Several also offer critical illness policies.

Several friendlies declined to reveal their results including Red Rose, Shepherds and Tees Mutual.