How Friendly is a Friendly Society for Children's Savings?

Are you in a Friendly Society? It is not an Orwellian term for a futuristic community. Actually, a Friendly Society is an organisation that provides various financial products, such as a savings scheme for children. Their popularity is greatly due to the many tax benefits that they provide. This makes them attractive to both parents and grandparents who want to invest in their child’s or grandchild’s future.

Today, Friendly Societies provide a range of Children’s Savings options, including:

· credit management

· insurance

· ISAs

· loan management

· pension management

· unit trusts

Insurance is just the beginning

Before understanding how Friendly Societies’ Children’s Savings schemes work, we should first become acquainted with the creator’s of the accounts. While Friendly Societies mainly provide insurance, they are not insurance companies per se. They have many small customers, revealing their mission of providing financial assistance to the Working Class.

You can choose from a variety of saving options that are typically funded monthly or yearly, and lasting for a term of one decade. While the monthly or yearly contribution limits for Friendly Society accounts are fairly low, their savings accounts are tax-free.

From friendly people to a friendly society

How were Friendly Societies created? A few centuries ago, they began as “self-help groups.” Groups of people met in public places, to determine practical ways to offer assistance to the Working Class in planning for their future. This aid took the form of insurance protection, and sickness and death benefits. Friendly Societies had roughly 14 million members, by the year 1945. They were included in a system of roughly 18,000 societies and branches. However, the number of Friendly Society members decreased significantly when the government created the Welfare State in 1948.

Today, individuals and organisations use a variety of means to sell Friendly Society products, such as through Independent Financial Advisors (IFAs), and directly to the public through newspapers and magazines.

Should you bond with a baby bond?

The “baby bond,” one product of Friendly Societies, creates equity investment via a friend, while granting growth and payouts that are tax-free. Two types of plans exist: a “with-profits” plan and a “unit-linked” plan (usually taken out for a minimum of 10 years). To remain within tax limits, you can only invest a minimum of £25 a month, or £270 a year. The majority of these baby bonds provide limited life insurance for children more than 10-years-old. Also, only children below 16-years-old can avail of Friendly Society baby bonds.

You should certainly be very cautious about selecting baby bonds. They have two main drawbacks. First, they have high charges. Factoring in charges, if you invested £25 a month in some Friendly Society baby bonds, up to two-thirds of your investment could be earmarked for charges. That is a sky-high figure!

Secondly, baby bonds are not flexible. During the first year, roughly 50% of your premiums will be used for set-up charges. If you need to cash out the policy within a few years, you will receive a drastically lower figure than you paid in premiums. In almost all cases, a children’s building society account would have produced superior returns.

by Edward D Parry