Take the friendly route to managing finances

They have a proud history with many tracing their foundation to the Industrial Revolution. Some were established to provide an income in old age or insurance against sickness or inability to work. One of the oldest raised regular small savings to pay for a coffin and support for a mariner lost at sea.

Today several still specialise in healthcare, either to fund the cost of medical treatment or to provide an income in the event of illness.

In the investment world, friendly societies offer a wide variety of products including Child Trust Funds, Individual Savings Accounts (ISA), short-term annuities, funeral expense plans, life assurance and both income and investment bonds.

Yet the unique feature is the Tax-Exempt Savings Scheme (or TESS).

Although the money that can be invested is small – 25 monthly or 270 annually, even though the figures do not equate – they can grow into useful sums.

There are not too many investments that can return over 13 per cent year on year – and be offered on a tax-exempt basis! Such savings are separate from other arrangements, like ISAs.

Most such schemes are written for a minimum of a decade but it is possible to opt for a longer period, such as 18 years – if thinking of a policy for a baby who may be going on to college in their teens – or even a quarter century. Clearly the compound effect of growth will ensure even more impressive results if policies are written for long periods forward.

Unlike ISAs, where the minimum age is 16 (for cash plans) or 18 (for stock market related), there is no age limit with a TESS although some providers may set a higher one on account of life cover.

In choosing your TESS provider, consider:

n past performance;

n sum assured after charges;

n asset mix.

n additional benefits (from discretionary grants to part-funding dental and optical costs).

Two Yorkshire-based friendly societies top the tables on performance. Taking a matured 10-year policy for a non-smoker male who was 29 on commencement and who had contributed the maximum 25 per month, the results show that not all societies have been skilful with your money.

Sheffield Mutual takes top position with maturity values of 5,992 (no life cover) and 4,974 (with life cover) which equates to annual growth of 13.46 per cent and 9.91 per cent respectively. The sums assured were 3,829 and 3,061.

Druids Sheffield paid 4,830, which equates to 9.1 per cent annual growth plus an additional 175 discretionary grant.

These two friendly societies probably gained the top positions because of their high property assets. Sheffield Mutual has 34 per cent in fixed term leased commercial property and 16 per cent in commercial mortgages whilst Druids Sheffield has 75 per cent in residential property.

Both friendly societies have relatively new chief executives: Tony Burdin, 48, took the helm at Sheffield Mutual 15 months ago after working for over 30 years in the mutual sector, whilst in April Mark Sedgley, 44, became CEO at Druids Sheffield, which is based at Wath upon Dearne, near Rotherham.

Healthy Investment in Manchester offered the third best return of 4,273, which equates to 6.35 per cent annual growth. The sum assured was 2,812. The society changed its name from Rechabite and has also stopped giving a discount to teetotallers.

It has as much as 65 per cent invested in fixed interest, which many would consider too high a ratio, but 27 per cent in equities (the same amount as Sheffield Mutual).

Wakefield-based Kingston Unity has fallen from third to fourth place in the past year. From a 7.8 per cent growth, it only achieved 5.8 per cent last year, paying 4,040 on maturity (2,893 sum assured). Led by Andrew Townsley, it has 52.1 per cent in commercial property, 18.6 per cent in UK equities but no equity interest abroad at a time when emerging markets are really strong.

Not all friendly societies have a long history. Compass, based in Hampshire, started 15 years ago and only offers a TESS, splitting its assets equally between Newton Income and Newton Managed funds.

It paid 3,578 on a maturing policy, which is 3.4 per cent annual growth (2,250 sum assured). This is noticeably higher than a year before when annual growth showed only 1.7 per cent.

Harrogate-based Engage Mutual Assurance, formerly known as Homeowners, was started in 1980. Its unit-linked TESS only achieved 3.3 per cent annual growth, paying 3,552 on a maturing policy (2,250 sum assured). Investments track the FTSE All-Share index.

The largest friendly society of all, LV= (better known as Liverpool Victoria) produced derisory results. From 3.5 per cent annually a year ago, a maturing policy now pays 1.41 per cent pa with 3,222 (2,250 sum assured). Perhaps the analogy might be made with an oil tanker and the time taken to adjust direction for its lacklustre with-profits fund which has a staggeringly high 31.2 per cent in gilts and fixed interest.

Several friendly societies are open only to those who work in particular occupations and so it is worth enquiring if they offer a TESS. Police Mutual Assurance, for instance, is open to those in the police service including support staff and their families.

Its results though are almost rock bottom, returning 3,247 which is just 1.5 per cent annual growth (3,069 sum assured). Only a year ago, maturing policies paid an annual 4.4 per cent growth.

The maturity sums paid are not the only benefits. Some offer a social element, such as Druids Sheffield, which appeal to all ages.

Bristol-based National Friendly makes a further education and training award of at least 1,000 annually for three years towards the post-A level studies or university costs for three lucky members.

Healthy Investment help those who are studying full-time and have been members at least three years with grants of approximately 500.

Based on the maximum monthly TESS contribution, Sheffield Mutual pays up to 25 bi-annually towards both dental and optical costs whilst Druids Sheffield has given discretionary grants triannually based on performance, amounting to 175 over the past decade.

'A good idea for not a lot of money'

Colin Rotherham, 47, from Mexborough, heard about Druids Sheffield Friendly Society through a friend. He was looking for a long-term savings plan and the tax-exempt aspect carried real appeal.

On learning about their 25 a month scheme with a guaranteed sum assured of 2,700 but which is currently paying over 4,800, Colin opened three accounts in May: one each for his wife, Katharine, himself and his five-year-old son, Thomas.

"A TESS is a really good idea for not a lot of money," says Colin, a self-employed joiner. After comparing rates, he has also moved into two other financial products with Druids Sheffield, transferring his son's Child Trust Fund and starting a new ISA for himself.

Away from work and finance, Colin enjoys motorbikes and walking his dog.

Contact: Druids Sheffield 01709 876409.