Conal Gregory: Try the friendly way to get the most out of financial services

They are mutual organisations without shareholders. Instead each is controlled and shared by its members. They range in size from the massive LV= (formerly Liverpool Victoria) to tiny ones used for in-house pension schemes.

Whilst the oldest building society can be traced to Kettley’s, founded by a pub landlord in 1775, friendly societies have a far longer antecedence. The oldest is thought to be the Incorporation of the Carters in Leith, dating from 1555.

They predate the welfare state. By accepting regular subscriptions, friendly societies could help those who fell sick or suffered distress. The earliest provided welfare and a funeral when the main breadwinner was lost, such as a sailor at sea.

Yorkshire was foremost in establishing female membership societies, notably Barwick-in-Elmet, east of Leeds, in 1778 and York in 1788. Several continue to provide a benevolent side and some use the term ‘lodge’ for their district memberships.

Financial help to cover periods of ill-health is still part of the criteria for some, such as York-based Beneden Healthcare. Founded in 1905, it has 900,000 members and an annual income exceeding £102m.

The FCA regulates some 200 friendly societies but there are 35 of notable size with combined assets of over £22bn.

Today there are broadly three types of friendly society:

Offer investments and protection insurance

Provide income protection, known as the Holloway scheme, and other health products

In-house scheme for annuities and pensions.

Some societies restrict membership to those employed in a particular industry or their family, such as the civil service, dentists, pharmacists, police, railway engine drivers and teachers. A few, like the Communication Workers, now accept all applicants.

Under pressure to have adequate assets to sustain the high costs of regulation, there have been quite a number of amalgamations. In Yorkshire Harrogate-based Homeowners, which also traded as Engage Mutual Assurance, has joined Family in Brighton whilst Druids Sheffield from Wath upon Dearne near Rotherham has gone into the Manchester Oddfellows.

Children’s Mutual, which had substantial savings business for youngsters, has been taken over by Foresters Life. Sons of Temperance have joined Compass, Pioneer amalgamated with Exeter and the Rechabite has changed its name to Healthy Investment.

The unique investment product is the tax-exempt savings plan (TESP). The aim is to provide a tax-free guaranteed cash sum at the end of the term, which is usually at least 10 years but can be longer, such as 18 or 21 years. The money is normally placed in a with-profits fund but some societies prefer unitised schemes.

The premiums are small to encourage even infants: £25 monthly or £270 annually, even though the two do not equate. The maximum subscription levels – as lower sums can be applied depending upon each society – have not changed since 1995. Adjusted for inflation, the monthly rate should have risen to £46.58 today, according to Andrew Townsley, chief executive of Kingston Unity.

Usually bonuses are added annually but some societies (Druids in the past) have paid out during the term. A terminal bonus can be added but no withdrawals are permitted.

When considering which TESP to take, consider the sum assured, past maturity value even though it is not guaranteed, asset mix, if any life cover is included and extra benefits. Remember that charges may mean little or no return of premiums if the policy is surrendered early.

Looking at a 10-year TESP based on £25 monthly premiums which matured at the end of last year, there are very divergent results, all with life cover except Sheffield Mutual:

Druids Sheffield £4,885 (includes £55 interim bonus)

Kingston Unity £3,273

Scottish £3,481

Sheffield Mutual £3,892

Lesser results are not uncommon, such as £3,785 (Foresters) and £3,666 (Family).

Sheffield Mutual, founded in 1892 and now based at Tankersley, Barnsley, also pays discretionary dental and optical grants up to £30 every two years once the policy has passed its first anniversary. It offers a TESP both with and without life cover.

The benefits from Oddfellows are lower for dental and optical at £25 bi-annually but additionally there is an emergency financial help up to £700 for flood or fire, a legal aid scheme for personal injury and employment disputes and a convalescence or care benefit available.

Apart from the cost of including life cover, the asset mix varies significantly. Property has traditionally been a major part of the investment in the Yorkshire-based societies and today commercial accounts for 45 per cent with Sheffield Mutual and over 25 per cent at Kingston Unity. On the equity side, look for a fair amount of non-UK for growth, such as Scottish which has a quarter of its with-profits funds invested.

Income protection means payment if for any reason you are unable to continue your work. It is vital that the policy states your exact role and responsibilities rather than ‘any work’. Friendly societies can offer a type named after a Victorian MP, George Holloway. If no claim is made, the policyholder still benefits from profits generated – a ‘win, win’ situation.

Cirencester Friendly, Original Holloway and Wiltshire are noted for such policies.

In addition to the TESP, consider the growth potential and capital guarantee of an investment bond. This is an attractive way to place a lump sum and many societies offer the option to receive a regular income.

For tax efficiency, look at the ISA offers made by friendly societies, both adult and junior. Few other organisations have with-profits funds as the basis for an ISA. Open-fund collectives like unit trusts are not able to offer the smoothing effect of with-profits or the lower volatility.

Scottish, based in Glasgow, offer a UK tracker, UK managed or united with-profits for its ISA.

Another product is aimed at those concerned about the cost of a funeral. Kingston Unity in Wakefield is among those societies with a ‘guaranteed acceptance’ plan for those aged 50-85. After one year of payments, which can start as low as £5 monthly, it will pay up to £25,000 on death. In the event of death in the first year, premiums are returned unless there are accidental circumstances in which case the full sum assured is paid. Premiums are not taken after the 90th birthday.

Case study: ‘Save a little and regularly’

Peter Gray, a 64-year-old retired teacher from Doncaster, heard about friendly societies from reading The Yorkshire Post. He subscribed to a tax-exempt savings plan or TESP with Sheffield Mutual.

The investment has now matured and Peter has opened a successor TESP as well as two investment bonds. “As a small saver, I keep a close watch on investments and like small organisations,” says Peter, who used to teach in primary and middle schools. “My parents encouraged me to save a little and regularly.”

Peter has also entrusted his ISA to Sheffield Mutual. “I like the fact they keep money in the local community,” he adds.