Look for societies
offering friendlier savings

Few realise just what outstanding value are the best performing savings schemes offered by friendly societies. Not only is it possible to obtain over nine per cent annually but such returns are almost totally tax-free.

Friendly societies are mutual providers owned by their members. Most originated in the 19th century as self-help organisations to assist with healthcare, which is still a major role. Others can trace their foundations earlier to providing funerals and support for those lost at sea.

There have been a few founded more recently: Civil Service in 1929, Compass in 1995, Dentists’ and General Mutual Benefit in 1927, Engage Mutual Assurance in 1980, Exeter in 1927, Family in 1975, Pharmaceutical and General Provident in 1928, Police Mutual in 1922 and Schoolteachers in 1922.

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Traditionally societies focused on the less affluent. This probably explains the restriction placed by the Treasury on the maximum which can be invested in the tax-exempt savings scheme (or TESS): £25 monthly or £270pa, even though the figures do not equate.

If the society agrees, smaller sums can be invested, which is a great way to encourage saving by or for children. The minimum length of such policies is 10 years but they can be written for far longer, such as 18 or 21 years to assist with education or to help with the deposit on a first home.

The money may be invested in a unit-linked savings scheme or a with-profits fund. Societies with the former include Compass, Engage Mutual Assurance (better known as Homeowners) and Family. They place the money in designated stock exchange collectives.

Compass has chosen two Newton funds: almost equal amounts in Managed and UK Equity respectively with just 1.06 per cent cash. With Engage Mutual Assurance, part is placed in the FTSE4Good exempt fund.

With unit-linked, avoid societies with high proportions in cash, fixed interest or a combination as the money is likely to severely under-perform. Worryingly high levels are held by Foresters (37 per cent), Healthy (72 per cent), Red Rose (74.9 per cent) and Railway Enginemen’s Assurance (80 per cent).

Look instead for high equity and/or property holdings. Check, too, if the sum assured is guaranteed or not. If life insurance is important, opt for such policies but if you have sufficient cover already, better returns can be achieved by societies which eliminate this element.

The top TESS providers for policies maturing at the end of last year after £25 invested monthly over a decade are:

Druids Sheffield: 9.7 per cent (£5,005) without life cover or 9.1 per cent (£4,830) with life cover

Sheffield Mutual: 7.01 per cent (£4,278) without life cover or 5.41 per cent (£3,941) with life cover

Engage Mutual Assurance: 5.24 per cent (£3,924) with life cover

Healthy Investment: 5.09 per cent (£3,982.46) without life cover or 4.74 per cent (£3,904.46) with life cover

LV=: £4.72 per cent (£3,819.09) with life cover

Kingston Unity: 4.4 per cent (£3,759) with life cover

These are the annual rates achieved. The top performance shown for Druids Sheffield include discretionary grants paid in 2003 (£55), 2006 (£55) and 2009 (£65). They are not guaranteed.

Four of the top six societies are Yorkshire based: Druids Sheffield in Wath upon Dearne near Rotherham, Engage Mutual Assurance in Harrogate, Sheffield Mutual in Tankersley, Barnsley and Kingston Unity in Wakefield.

Three have a high proportions invested in property: residential accounts for 66 per cent of the with-profits fund at Druids Sheffield whilst commercial property is the preferred route for both Kingston Unity (39.3 per cent) and Sheffield Mutual (47 per cent).

There are only a few negatives for the TESS. The amount that can be invested is very restricted: if adjusted for inflation since the limit was last set in 1994, it would now be worth £43.46 monthly or £455.17pa, according to Andrew Townsley, chief executive of Kingston Unity.

The charges can be high in the first year or two and in some cases your saving will be totally taken if you should close. Therefore, a TESS must be seen as a long-term investment.

Like all collectives, performance will vary between providers and it is essential to look at not only past results but where the money is to be placed. Although they are termed ‘tax-exempt’, this is not quite correct as dividends attract a 10 per cent tax which the societies cannot reclaim on behalf of members.

Some societies offer other carrots. Engage Mutual Assurance has four volunteering projects, each worth £5,000, which members can apply for.

Dental and optical discretionary grants with no upper limit are offered by Foresters and a more limited bi-annual help depending upon the amount invested is available through Sheffield Mutual.

Student members of Healthy Investment entering higher education can apply for a bursary. Last year it awarded 15, each worth £150. They must have been a member for at least three years.

The friendly society giant, LV= (Liverpool Victoria) with £11.4 billion assets, grants generous discounts on other financial products, such as 15 per cent to TESS holders for travel insurance and 10 per cent off car, home and pet cover.

Investments up to 90 per cent with no upper limit are protected by the Financial Services Compensation Scheme but – unlike credit unions – no friendly society has been in problems for many years.

Friendly societies move with the times and offer many other products beside the TESS. In savings, some offer a stocks and shares ISA and – for children – a Junior ISA and its predecessor, the Child Trust Fund.

Health plans for dental and optical treatment are available through several, such as the Civil Service.

Many have protection plans which cover critical illness, mortgage cover and other areas. Income replacement insurance is a speciality of Cirencester, Dentists’ and General Mutual Benefit, Dentists’ Provident, Original Holloway, Pharmaceutical and General Provident and Wiltshire.

The latter are often referred to as ‘Holloway’ plans after the Victorian MP for Stroud, George Holloway. Such plans cost more on their annual premiums because they provide a small nest egg upon retirement.

As the names imply, some societies are exclusively for those working in such occupations and sometimes their families.

All who work in the railway industry, for instance, qualify for the Railway Enginemen’s Assurance Society whose policies pay out if a member is permanently removed from post through a disability, such as colour blindness.

However, its 10-year TESS pays an appalling 0.84 per cent annual return on maturity.