Friendly promises prove misleading: Tax-free investment does not necessarily mean risk-free, writes Maria Scott

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The Independent Online
FRIENDLY societies are screaming for the attention of savers, promoting the supposed virtues of their tax-free investment schemes. Not all those with experience of friendly societies would recommend them.

We highlighted recently the experience of Richard Huddy and his wife Alice, who bought friendly society policies 10 years ago from Fleet Friendly Society and Teachers Assurance.

Dr Huddy had been told to expect a maturity value of up to pounds 4,330 from his Fleet policy, now run by Homeowners' Friendly Society, which compared badly with the pounds 5,441 paid out to his wife by a similar Teachers Assurance policy.

This article provoked a stream of letters from other friendly society investors told to expect even less for their policies. None of these people has lost money through their investment but their experiences drive home the message that tax-free does not necessarily mean risk-free.

Several Independent readers have complained about bonds invested in Family Assurance's Managed Capital Fund.

Some Family Assurance investors are doubly disgruntled because they were attracted 10 years ago by advertisements indicating much higher returns. These pre-dated the Financial Services Act, which limits telephone-number projections.

Advertisements by investment adviser Towry Law, for the Family Assurance bonds, had the headline 'quadruple your investment in 10 years'.

One reader, who does not want to be named, complains that the pounds 2,700 he invested was worth pounds 3,577 when he withdrew the money in January after the full 10 years, a profit of just 32.5 per cent, despite tax relief on his premiums and tax exemption on the friendly society's funds. The reader's return compares to an increase of 395.48 per cent in the FTA All Share index over 10 years to the beginning of this January.

Had this man invested the same pounds 2,700, in monthly amounts of pounds 22.50 in the average performing investment trust savings scheme over 10 years to the beginning of January, he would have received pounds 5,647.86. This would have been before expenses, so the comparison is not strictly like-for-like, but charges on investment trust savings schemes are normally quite small. Also, there are no special tax breaks on investment trust savings.

Another reader, John Pike, also has a family bond invested in the Capital Fund. The managers, he says, 'need pursuing with vigour to get their act together and produce results.'

John Reeve, chief executive of Family Assurance, defended returns on his policies although he conceded that the performance of the Capital Managed Fund was not as strong as he would have liked. He said it was unfair to compare it with the FTA All Share and investment trusts because in its early years the Capital Fund was forced by legislation to keep half its money in low-risk investments, such as gilts.

Returns had been reduced by expenses but these were in line with the society's costs in running the policies. The price of units in the fund had gone up 250 per cent in the last 10 years. Investors did not have to take their money out after 10 years. With market conditions improving, investors might improve returns by waiting.

Another reader, Ian Cocks, is disappointed with the pounds 4,099.62 he had been told to expect on his policy, originally taken out with Savers Assurance, later taken over by Time Assurance, which was taken over by Templeton Life Assurance.

David Rees, general manager (administration) at Templeton, said that Savers' funds had been closed to new business. Policies such as Dr Cocks's were with- profits, with guaranteed bonuses built into them. In order to avoid the risk that the funds could not meet the bonuses, the fund managers had stuck to deposit-based investment and avoided shares. This affected performance.

Savers Assurance merged with Time Assurance after the abolition of tax relief on insurance policies brought a fall-off in business for friendly societies 10 years ago, one of numerous examples of the way legislation has adversely affected these institutions and their investors.

Friendly societies have recently won the right to diversify from their traditional tax-free policies with a maximum annual premium of pounds 200 into areas such as personal equity plans. This should help them to expand. Family Assurance is working on diversification plans now.

Nevertheless, friendly societies' traditional schemes are still insurance policies with charges that eat heavily into their small premiums. They have poor early-surrender terms.

Societies counter criticisms with the argument that they are one of the few ways to gain exposure to stock market investment, with some life insurance, for a few pounds a week.

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