The friendly way to invest and without the worry of paying tax

Amazingly few investors and even financial advisers appear to be aware of the savings plans which friendly societies can offer. One of their crucial features is that they are tax-exempt, making such schemes an ideal first investment for both an adult and child.

Friendly societies can be specific to an occupation; such as railways

As a friendly society is a ‘mutual’, it has no shareholders to satisfy but is owned instead by its policyholders, known as members. This means that all surplus funds are used to provide benefits and boost returns rather than pay dividends.

Their origins date back several centuries when they gave help to families following a loss at sea and, in the 19th century, factory accidents. The sense of providing assistance beyond the purely financial return continues with several societies funding part of the costs of dental and optical care and even student bursaries.

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Most friendlies have developed a selection of straightforward investment products. The latter is usually on a with-profits basis which means the money invested is pooled and an annual bonus added to which some societies offer a final one as a top-up.

The benefit of such pooling is to reduce volatility and have a professional stock picker employed at low cost.

Such a pool should have a diversified range of assets without exposing your capital too far. Ask an intended friendly about its asset mix which should have a fair proportion – perhaps one third – in equities of which some should be global, together with fixed interest securities, property and just a small amount in cash to pay policies as they mature.

The alternative approach taken by some TESP providers is a unitised scheme where the underlying investments are priced regularly and there is no massaging of the highs and lows of the stock market performance. OneFamily , for instance, takes the unitised way whilst Foresters offers both with-profit and unitised routes.

Investors are protected as each friendly society needs to be authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA), as well as being a member of the Financial Services Compensation Scheme if anything should go wrong.

The cost of regulation is onerous and some societies have decided to amalgamate as otherwise continuing to trade was eating into members’ savings too far. The following have merged:

Sons of Temperance joined Compass

Ideal Benefit and Rotherham-based Druids Sheffield joined Oddfellows

Harrogate-based Homeowners (also known as Engage Mutual) joined Family to become OneFamily

Pioneer joined Exeter

Scottish Legal Life joined Scottish Friendly Assurance.

By asset size, LV= (formerly known as Liverpool Victoria, founded in 1843) is by far the largest friendly, followed by Scottish, OneFamily, Police Mutual and the Oddfellows.

OneFamily is not only the amalgamation above but earlier took in Drummond Assurance and Lancashire & Yorkshire Assurance.

Some friendlies concentrate on protection policies and do not offer tax-exempt savings plans (or TESPs), such as Anglo-Saxons, Cirencester, Civil Service Healthcare, Communication Workers, Exeter, Health Shield, Original Holloway and Wiltshire.

A few have stopped accepting new TESP business, such as LV=, National (formerly National Deposit) and Schoolteachers.

Check if there is a society established specifically for your occupation, notably dentistry (Dentist & General Mutual Benefit and Dentists’ Provident), pharmacy, police service, railway and teachers.

On the investment side, many offer ISAs (both cash and equity-based), investment bonds and regular savings.

When considering a TESP, look for the guarantee offered, which is the minimum final amount or sum assured. This is the money that will be definitely paid out, plus any bonuses, which once added cannot be taken away, providing all premiums are made and the policy is held to maturity.

Following both a review of performance and a board examination, societies usually declare a bonus on an annual basis, which is sometimes referred to as ‘reversionary’.

Ask, too, about past performance. Sheffield Mutual, for instance, returned £3,791.62 on a 10-year policy which matured at the end of 2016 where £25 monthly was contributed. This equates to an annual 4.65 per cent growth rate.

Life cover comes automatically with some friendlies but where it is optional, if it is not required, the investment return will be higher.

Currently, TESPs are restricted to either £270 annually or £25 monthly. Curiously the figures do not equate. Unfortunately, successive chancellors have not increased the allowance for 22 years.

No declaration has to be made on any tax return. The TESP allowance is quite separate from the ISA and Junior ISA where for this tax year up to £20,000 and £4,128 respectively can be saved.

Like an ISA, a TESP allowance is lost if it is not used. Unlike a pension contribution, it cannot be backdated. It is not related to a specific tax year but each policy is written as running for so many calendar years.

Whilst the minimum term is 10 years, many societies encourage longer periods, such as 18 or 21 years for infants. This allows a really worthwhile nest egg to be built up which can provide the basis for a first home or other large outlay.

In Yorkshire, the two stars are Kingston Unity, based in Wakefield (01924 240164) and Sheffield Mutual, based at Tankersley, Barnsley (01226 741000). Both traditionally have high proportions of commercial property in their assets which explains their good results.

Druids was based at Wath upon Dearne, near Rotherham, and used to regularly pay a discretionary bonus every three years following a full valuation. It had a high level of investment – sometimes reaching 70 per cent – in domestic property but its exciting returns are unlikely to continue since the merger with the far larger Manchester-based Oddfellows.

Among other leading TESP providers, compare performance and terms offered by Compass in Odiham, Hampshire, Foresters in Southampton, Healthy in Bury, Nottingham and OneFamily in Brighton.

Those holding older policies may find significant name changes. The Rechabite in Manchester, which used to give a bonus to teetotallers, is now known as Healthy and is based in Bury. If there is a problem in locating a current provider or their address, contact the FSA.

As mutual societies, the work that friendlies quietly undertake – such as a bereavement service available through Police Mutual – and in supporting local and regional good causes often goes unreported. Many manage to be altruistic whilst acting as key investment providers.

Finally, check if your preferred friendly has an incentive upon taking out a TESP. Some give shopping vouchers and other carrots to relatives and friends who introduce a new investor.

Personal recommendation counts for far more than the glossy advertisements which hardly any friendly society can ever afford.