Slow and Steady

A cautionary tale of why reading the small print is important.

Posted on: May 10, 2009

I saw this article in the week and wanted to share it.

This is the perfect example of why you need to; 1) Read the small print and 2) Understand what you are signing up to.


Fifty-six pence – barely enough for a pot of yogurt or a packet of crisps. But that’s exactly how much Claire McDermott was told she would get after saving £25 a month over 10 years with Scottish Friendly. Her £3,000 investment was set to pay £3,000.56 – earning 5.6p for each year.

Her experience puts a huge question mark over the value of tax-free friendly society plans held by millions of lower- and middle-income savers in Britain.

McDermott, who lives in Surrey, bought a plan in 1999 after she saw a Scottish Friendly advert proclaiming that its “Scottish Bond” was the “ideal way to take advantage of your tax-free savings allowance”. Under legislation dating back three decades, friendly societies can take in up to £25 a month to invest in tax-free savings plans.

She received a keyring bottle opener – worth more than 56p – for responding to the mailing. McDermott, 29 at the time, signed up to start in March 1999. She was sent a £10 Marks & Spencer gift voucher.

The large print on the mailings promised “substantial tax-exempt saving” and “security plus growth potential”, adding, “as we don’t have shareholders, all the profits we make are paid out to our policyholders as bonuses”. There were unattributed ­testimonials telling how customers used plans to fund cruises, conservatories and weddings.

Finally, the clincher for McDermott: the big print showed anyone saving over the previous decade would have turned £25 a month into £5,203. But in the small print was a warning of high charges and big initial deductions, both now familiar to endowment victims.

The Glasgow-based organisation took the entire first year’s £300 payments – covering her keyring and M&S voucher more than 20 times over. So had she wanted to exit the fund after one year, she would have had nothing. There were other deductions as well.

The key-features document, home of the small print, showed that if the fund grew at 12% a year, policyholders would get £4,740. Achieving the £5,203 would have needed growth of around 15% each year – unlikely at any time, the more so when inflation and interest rates were falling.

The costs were also expressed in another way – reduction in yield. This shows the percentage an investment has to grow to pay the plan’s expenses before the policyholder starts to earn any money. In this case, the reduction was a massive 2.9%. But even that, as the small print shows, was not guaranteed. “Our deductions may turn out to be higher than anticipated,” it warned.

McDermott received optimistic bonus mailings in the early years. But by last year, the bonus notice had no heading at all – and only 0.75% added.

“To make matters worse,” she adds, “they offered me the option of a further year of paying £300 but all they would guarantee was an ­additional £225. They failed to answer requests for information over charges, how my money was invested, and what I would have earned without their fees.”

Scottish Friendly was more forthcoming when Guardian Money called. It said the costs incurred in providing the policy amounted to £867, including the £326 setup charge and the cost of “life insurance” – the value of the policy at the time of death. For a woman of her age, this would cost pennies.

It added that without “tax freedom” she would have received around £100 less from her savings. Friendly society tax-exempt savings plans (Tesps) are free from the “composite” tax rate levied on life companies. But as this contains an element for capital gains, which most investors do not pay, its value is limited.

Scottish Friendly says it amended her payout to £3,015.93. It concedes this is “not a massive difference” and says: “While we clearly understand her disappointment, in the context of returns achieved by competing products, we believe we have sheltered investors from the worst excesses of the market downturn as well as providing life cover.”

But if McDermott had put £25 a month into an Abbey regular saver plan, her £3,000 would have produced £3,841 before tax.

Some other friendly society plans have produced slightly less worrying returns. A similar policy at Liverpool Victoria’s LV= scheme would have come up with £3,509 and although Engage Mutual was unable to produce a figure, pleading “prior actuarial commitments”, a recent Money Management table points to around £3,600.

But the best result comes from the little-known Sheffield Mutual. It has only a handful of investors but would have turned the £3,000 into £6,356.

Fewer friendly societies now market tax-free plans than 10 years ago. Family Assurance only sells plans to existing customers, although Scottish Friendly is active in pushing the policies.

Many question the point of Tesps when tax-free Isas will be able to take in £850 a month after limits were raised in last month’s budget.

“The charges are high, the product is inflexible, the funds are unexciting and the tax savings are negligible for most,” says investment specialist Mark Dampier at Hargreaves Lansdown. “Over 10 years, an Isa is a better bet.”

Martin Shaw of the Association of Friendly Societies is, unsurprisingly, an advocate. He says: “Societies have worked hard to ensure charges on more traditional products are competitive. Over the past 25 years, friendly society with-profits funds have outperformed non-friendly society funds, But we are about more than investment. Friendly societies are vibrant and vital, and should be an important part of plans for a more secure financial future.”

I would be furious if this happened to me, however, I would hold myself somewhat accountable.

I think the lady in question should have made sure she understood what costs are involved, £867 in just sounds ridiculous.

I really hope that the lady in  question learns from this and puts her money in a better home, although to be honest most saving accounts are paying virtually no interest now.


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