INVESTMENT - 14.04.2010

ISAs aren’t the only tax-free savings in town

Tax-free limits

Before Individual Saving Accounts (ISAs) we had Personal Equity Plans (PEPs). Both offer(ed) tax-free income and gains on your money. However, there’s a limit on the amount you can invest in any one tax year. This was £5,100 for 2009/10, and has now risen to £10,200 for 2010/11. If you don’t use it, it’s lost forever. But peoples’ finances don’t always fit in to suit the tax year, so if you’ve missed out on your 2009/10 ISA allowance, is there an alternative?

Friendly investments

There’s no direct alternative to ISAs, but long before either they or PEPs appeared on the scene certain types of insurance company, namely Friendly Societies (see The next step), were offering tax-free investments. The Taxman allows special treatment for “Friendly Societies” that trade mutually, i.e. the profit they make is paid out to, or used only for the benefit of, its members (investors).

Tax-free bonds

The tax-free investments offered by Friendly Societies go under a variety of names, for example Family Saving Plans, Family Bonds, Childrens’ Bonds. Whatever their name, they can easily be recognised by the terms and conditions that apply:

• the maximum investment is £25 per month for each investor

• if the investment is made once a year rather than monthly the maximum amount is reduced to £270

• the investment must run for at least ten years to maintain its tax-free status.

Trap. Although you can stop paying into the savings plan at any time and get your money back, along with any growth in value, the tax-free status is lost if you cash the bond in within the first ten years.

No age bar

Tip. Invest for all family members -Friendly Society tax-free savings are open to investors of any age. So if you have children, they can also have an investment in their name, even if you or your spouse pay the premiums. For example, a family of four can invest up to £1,200 per year into a Friendly Society savings plan.

Extra insurance

As icing on the cake, this type of investment is usually linked to a life insurance policy that will pay out a guaranteed sum in the event of the death of the investor. Typically, this will be the greater of around ten times the amount of the annual investment or its value.

Is it worth it?

Don’t be lured into buying a Friendly Society bond etc. before checking the investment track record. Tax-free status isn’t a guarantee of a good investment.

For more information on Friendly Societies that sell tax-free bonds, visit http://tax.indicator.co.uk (TX 10.14.02).