Personal Finance: Friendly but unrewarding

FRIENDLY societies were hit by a wall of money 10 years ago as pre-Budget leaks predicted the end of tax relief on life insurance premiums.

Those 10-year policies will be maturing in February and March, and there are likely to be quite a few disgruntled investors who get less than they were expecting. Many societies will be reminding investors that they do not have to take the cash after the 10 years are up, but can leave the money to roll up tax-free.

Many investors who expected megabucks from these plans will invoke Mandy Rice-Davies - 'They would say that wouldn't they' - and take the money anyway, when it is likely the friendly societies will be able to do as well as any new manager with the investment.

Ironically, the expected wail of discontent could help societies in their current campaign to get the limits on tax- free investment raised from pounds 200 to pounds 360 a year, with a promise of pounds 500 to follow.

Simply, the smaller the investment, the larger the bite taken out of it to cover the cost of administration. And the reason the performance of these funds over the past 10 years may not stand comparison with other forms of investment is that the amounts invested were so small.

For instance, someone investing pounds 9 a month in a 10- year Family Assurance policy could expect pounds 1,163 if the fund grew at 6 per cent, or pounds 1,530 with growth of 12 per cent. If the monthly sum was doubled to pounds 18, the returns would more than double because the expenses would be spread more thinly - a bounty of pounds 109 at 6 per cent growth, or pounds 186 at 12 per cent.

Friendly societies would claim they have been able to streamline and computerise their business so that the costs of setting up policies have been kept in check, and they now represent a good investment prospect with their tax-free status.

But it is likely that the growth area for friendly societies is in stepping into the welfare void left by the government retreat, rather than pure investment.

FOREIGN & COLONIAL is a sleek giant among investment trusts. Like a Rolls- Royce it consistently swishes ahead of the opposition.

This week it is opening up the trust to take in pensions. It has stripped the business of all frills: it will not get involved in giving advice, is reluctant to take in transfers from other schemes, and will not fiddle about collecting Serps rebates.

But as a simple pension or extra pension (AVC) it is cheap and easy to understand - and has a great track record.

Only a couple of unit trust groups offer see-through pensions. This is a field in which unit and investment trusts should be pushing ahead.

The other interesting development in pensions is the use of futures and options to give the sort of guarantees traditionally sought from with-profits policies.

Mercury, Skandia, Provident Mutual and Providence Capitol were joined in this derivatives game last week by Save & Prosper.

Its fund offers the choice of a guarantee of no losses with gains coming into the guarantee net every quarter, or losses limited to 2 per cent from quarter to quarter with the lure of one and a half times the rise in the FT-SE index.

These funds make the opaque with-profits pensions seem like dinosaurs.