These societies, some of which have been in existence for far longer than many banks, insurers and fund management groups, aren't always the most obvious home for investing. Even some of the largest, the Ancient Order of Forresters for example, have names that hardly smack of up-to- date money management expertise.
But the friendlies do offer one advantage - they're allowed to offer very tax-efficient savings and insurance policies for small amounts.
Currently, the societies are trying to work out how they fit into the Government's plans for individual savings accounts (ISAs), the vehicles which will replace Peps and Tessas next year. "In theory", says Peter Burnell of Family Assurance, one of the largest friendlies, "friendly societies should be viewed in sympathetic terms by the Government."
Mr Burnell points to friendly societies' historic role in providing pensions, health insurance and other benefits to people on low incomes long before the launch of the modern welfare state. "There's been a lot of synergy between friendly societies and the Labour Party in the past," he says.
Certainly, the Government envisages a role for friendly societies as ISA providers, explicitly mentioning them in the original consultation document. Some critics say the rule allowing investors to put up to pounds 1,000 into insurance policies will cause unnecessary complications but was written into the rules specifically to benefit friendly societies. But if the Government wants people on low incomes to save more, who better to help them? The societies already run several million tax-free savings plans where the maximum monthly contribution is just pounds 25, ideal for the low paid.
However, Marion Poole of the Association of Friendly Societies says: "The ISA proposals, as they stand, are problematic. Friendly societies want to be involved but it's difficult to see exactly how. The Green Paper containing the Government's proposals hasn't done the things we hoped it would," she says.
In particular, Ms Poole complains that the Government has done nothing to encourage low earners to save through ISAs. "Too much consideration has been given to people with large Pep and Tessa holdings," she says.
ISAs could even prove to be detrimental to friendly societies. Their most popular products, by some margin, are 10-year savings plans. Investors can save up to pounds 270 a year in them, which the friendlies invest in a range of assets from cash deposits to equities. As long as you don't cash in for at least 10 years, all the income and capital gains you earn are tax free.
However, under the current ISA proposals, up to pounds 1,000 worth of cash savings of this sort can be put into your plan each year, almost four times the friendly society limit. And while returns will still be cash free, you'll be able to withdraw your money from an ISA whenever you want rather than having to wait 10 years as you do with a friendly society.
Not surprisingly, many friendlies are concerned that in future investors will choose to save via ISAs. Marion Poole says: "Friendly societies see ISAs as a threat as well as an opportunity."
Essentially, she thinks, they will play a role in ISA provision in two or three ways. First, it's likely that friendly societies will offer their savings plans as the life assurance element of an ISA. Under the current proposal you'll be able to put pounds 1,000 worth of insurance products into an ISA each year and friendly societies would be well placed to offer this facility.
Also, some friendlies are now working towards getting authorisation for taking cash deposits in the same way as a bank or building society. This is tricky under the current rules, but the friendlies hope the Government will make things simpler when it finalises its plans for ISAs.
Finally, some societies will undoubtedly expand their investment activities. Until relatively recently, there were strict rules that limited their power to make certain types of investments, particularly in shares. These rules have now been relaxed but even so, only a few larger ones manage investments in the same way as other fund managers. However, it's likely that some of the largest friendlies will offer ISAs similar to those available from the mainstream investment managers. This will be very important as investors will only be allowed to use one ISA each year. So friendlies that don't offer a full range of savings and investment options may miss out on a large chunk of the ISA market.
The writer is features editor of `Investors Chronicle'.Reuse content