A little Friendly advice on the savings path

ISAs are not alone in offering tax exempt savings.

ISAs Are the devil's work. The government's new tax-free savings product has been designed to allow investors to have immediate access to their money with as little penalty as possible. If that's not leading us into temptation, then what is?

ISAs Are the devil's work. The government's new tax-free savings product has been designed to allow investors to have immediate access to their money with as little penalty as possible. If that's not leading us into temptation, then what is?

Friendliness, on the other hand, is next to godliness. There are some 270 friendly societies dotted around the country and the staple of these small, mutually-owned insurers are tax exempt savings plans often overlooked by investors. If you squirrel away up to £25 a month and don't touch the money for 10 years, your reward will be heavenly: you get the pay-out tax free.

The tax concession is unique to these institutions. It means that, in addition to any ISAs they may hold, savers can put aside up to £300 in a year to bump up their tax efficiency. According to research commissioned by IFA Promotion, the body promoting independent financial advice, if only a small proportion of the 16 million people currently saving through non-mortgage related endowment policies was to invest through friendly society 10-year saving schemes, £55 million could be lopped off the nation's tax bills.

Ann-Marie Martyn, managing director of IFA Promotion, said UK consumers are "being taxed left, right and centre" and any chances to avoid paying more than is necessary should be seized upon. "Friendly society schemes provide valuable extra shelter against the tax man, particularly in light of the falling limits on other tax-exempt products."

The long-term, tax-efficient nature of the schemes make them ideal investment vehicles for parents, grandparents or anyone else seeking to put some money aside for children. And because the money is locked away for 10 years, there is less chance of your being tempted to raid the piggy bank.

Friendly societies' tax breaks are a throwback to the pre-welfare state era when people banded together to create their own insurance against hardship and were encouraged by the government to do so. David Halliday, Tunbridge Wells Friendly Society's marketing director, said that the performance of the societies' funds are enhanced because profits are shared among members. "We are mutuals, and with our products any surpluses are built into the fund performance. There's no question of greedy shareholders," he said.

But the future of friendly society savings plans is increasingly being questioned. The tax benefits available through an ISA dwarf those of the friendly society and will still do so even when the ISA limits fall in the next tax year.

As the government pushes its new CAT standards - a tick of approval awarded to low-cost investment products - customers will feel encouraged to question the high charges levied by many societies.

Their savings products are never likely to meet a CAT standard. The reduction in yield - the amount of money lost because of charges on a fund - can be more than five per cent on some of the worst funds.

Independent adviser Stephen Dight, from Grosvenor Financial Services, has long been a critic. "I will always recommend an ISA instead, because of friendly societies' charges, lack of flexibility and poor past performance."

In some cases, the charges shaved off the fund could outweigh the tax advantages, so it is important to shop around for the best deals. Analysts at The Research Department, who calculate the cheapest savings plans available (see table), show that the best with-profits plans - which are low risk because they hold over some of the returns from the best years to ensure reasonable payouts in the bad times - have no charges at all.