Friendly societies must work harder

In the harsh early days of Britain's Industrial Revolution, friendly societies were beacons of benevolence amid the dark satanic mills. They were established to give financial help to workers who had fallen ill and could no longer earn their living.

But now, more than 200 years later, the smiling face of friendly societies is turning into a grimace. In today's cut-throat financial services industry, they are labouring to be competitive.

Despite a heritage of helping those on lower incomes, they don't always offer better value for basic life insurance or critical illness cover. "With the life market, [friendly societies] don't generally show up in terms of competitiveness. Companies like J Sainsbury now offer good, low-cost products," says Mike Owen, joint managing director of independent financial adviser (IFA) Plan Invest.

Financial advisers often criticise friendly societies' savings plans, which carry an element of life insurance and let you save up to ?25 a month free of tax for up to 25 years, either in a deposit account or a fund linked to the stock market. But the tax benefits can be eaten up by high annual charges, and there are penalties if you move your money elsewhere. "It all adds up to yesterday's product," says Mr Owen.

Nevertheless, there are still 250 friendly societies looking after ?17bn of funds for their six million members. In theory, since they are owned by their customers rather than by stock market investors, they are able to plough profits back into the business and so provide better products. Their income protection plans, for example, do offer significant savings.

Doug Thow, chief executive of the Association of Friendly Societies, stresses that they "can still be competitive for existing and new customers". Indeed, Liverpool Victoria, the UK's biggest friendly society with more than a million policyholders, often appears near the top of "best buy" tables.

However, Mr Thow is concerned that friendly societies now have an image problem and says more needs to be done to raise their profile.

The advent of child trust funds will help, as the societies have plenty of experience in running savings plans for children. But that doesn't mean they deserve to succeed, warns Kevin Carr, senior technical officer at IFA Lifesearch. "With a lot of deals, customer inertia keeps people with the societies," he says. "Liverpool Victoria is the only one that can take on the likes of Norwich Union and Legal & General and match them on price."

When it comes to simple life cover that pays out a fixed sum in the event of death, the best prices are available from supermarkets and banks. A 39-year-old male smoker buying a ?100,000 life policy over 15 years would pay ?20.30 a month for the cheapest policy, from Sainsbury's. The next-best deal is Tesco's (?21), according to financial infor- mation company Moneyfacts.

However, the same person would pay half as much again if he bought his policy from Foresters friendly society (?32.60) or Homeowners friendly society (?31.44), though Liverpool Victoria will charge a competitive ?22.60.

Customers are better off turning to friendly societies for income protection, since they tend not to discriminate when it comes to gender, how risky your job is or whether you smoke. This means some of the smallest societies can offer huge savings, and particularly to women, who usually pay higher premiums because of greater perceived health risks.

With Pioneer friendly society, a 29-year-old female smoker, aiming to retire at 60 and in a job deemed high risk, who wants income protection of ?1,000 a month will pay ?31.05.

Foresters, which does take gender into account, would charge her ?42.51 a month. Compare this to monthly premiums of ?150.07 with Allied Dunbar, the most expensive, and ?133.75 with Canada Life.

But if you want to invest in a tax-exempt savings plan, Plan Invest's Mr Owen thinks a friendly society is unlikely to be the best home for your money. "If you're saving ?25 a month, there are cheaper alternatives with unit trust savings schemes. The charges, particularly for investment trusts, are very low."

Some fund managers offer plans that invest your money in a tax-free individual savings account. A number of M&G funds are open to people with as little as ?10 a month to invest. Invesco Perpetual and HSBC set a minimum of ?20.