Tax-efficient investments: Friendly face of investing

Small is still beautiful for five million people. By Andy Couchman

INVESTING TODAY through a friendly society tax-exempt savings scheme can save up to pounds 25 a month or pounds 270 a year. Even at today's 20 per cent tax rate, that's quite an advantage.

Friendly societies were popular until the welfare state took over many of their responsibilities in 1948. However, they still have about five million members, attracted by the benefit of mutuality - there are no shareholders, which means that profits can be reinvested back to benefit policyholders.

Some 30 societies offer tax- exempt plans, and both unit-linked and with- profits plans are available. With their built-in tax advantage, they should offer a better deal than traditional endowments, but that depends on their charges and investment performance. Tunbridge Wells Equitable Friendly Society (Twefs), Scottish Friendly Society and Teachers Provident have all featured well in recent with profit surveys.

From April, up to pounds 1,000 a year may be invested in the life assurance element of an ISA, the Government's new individual savings account, and some societies are planning to launch their own versions. Societies lose some of their tax advantages from April, paying 10 per cent tax on dividends received for five years and full tax thereafter. That is likely to cut investment yields by 0.5 per cent a year. Even so, friendly societies may still be attractive for regular long-term savings.

Choosing the right policy

1. Look at past performance. While not infallible, a consistent record over a number of years indicates good investment management. Ignore comparisons with unlike investments such as building societies.

2. Ask to see independent evidence of how they compare to other endowment savings plans. Be wary of larger societies that do not take part in performance surveys carried out by magazines. They may have something to hide.

3. From April, check whether an ISA may offer better value.

4. Beware short track records.

5. Remember that you can invest only up to pounds 25 a month or pounds 270 a year into friendly society savings plans.

6. Friendly societies, as one of the few homes for small monthly savings, are good places to save for a child.

To find out more about friendly societies, the Association of Friendly Societies (AFS) publishes Making Friends With Your Friendly Society. The booklet contains details of the major societies, together with useful background information. The association can be contacted on 0171 606 1881.

The writer is the publishing editor of HealthCare Insurance Report