investment

answering some questions: friendly societies, record keeping and more

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Here are some more answers to the questions that you asked last week.

E.C. said:

Ok, weird question of the day, what is “plonkee?”

It’s a nickname that I’ve had for a few years. It comes from Only Fools and Horses, where the favourite insult was to describe someone as a plonker meaning idiot. Plonkee was meant as a sort of diminutive.

Pippin has two questions. Firstly:

how long should you/do you need to keep financial records in the UK?

Well, for tax purposes, you need to keep records relating to your tax returns for 22 months from the end of the tax year. If you’re self-employed that extends to 5 years from 31st January following the tax year. For companies it’s 6 years from the end of the accounting period.

This should include details of income, investments, bank statements and the like. If you aren’t claiming them on your tax return, there’s no particular reason that I can find to keep gas and electricity bills. If you need to verify your identity (for opening a new bank account or similar) then it’s extremely helpful to have bank and utility statements from the last 6 months, and mortgage lenders may like to see your financial records for the last year.

Secondly:

What’s the deal with “tax-free, with-profits savings plans from friendly societies”?

Well, friendly societies were originally set up to provide social insurance - effectively providing income, sickness and life insurance through a common fund to which members paid their dues. Nowadays, they pretty much do the same kind of thing although with more conventional underwriting.

One of the perks that friendly societies have is the ability to offer tax-free investments with a life insurance component. Within these plans you can invest up to £25 a month for 10 years tax-free. The money is usually invested in a with profits fund, and you also get life insurance for the duration of the plan which is usually the total that you were supposed to pay in plus a small 4%-5% bonus.

Although these aren’t bad deals, they are not great either. With profits funds - where the profits from good years are supposed to smooth out the profits from bad years - are complicated products (yes, that does mean that I don’t really understand them). Complicated does not usually mean cheap and with good performance. Friendly society investment products are usually designed to be cautious, and the fees can be substantial. These are the fees from Engage Mutual:

• Initial charge of 50% of each premium in year 1
• Policy Fee: £1 per month for monthly policies or £12 per year for annual policies. This is deducted from the premiums before they are invested
• Annual Management Charge / Guarantee charge: 1.25% of the fund value deducted on a weekly basis
• Life cover charge which depends on your age, amount of life cover and the unit value.

The alternative to a friendly society tax-exempt plan if you’ve exhausted all your tax advantaged funds would be to invest in a regular unit trust outside a tax wrapper. You can usually invest as little as £50 per month, and you can then use up your Capital Gains Tax Allowance (as Pippin pointed out) to get tax-free growth. Fund costs vary, but UK All Share Index funds start at around 0.3% per annum with no initial charge.

Friendly societies may offer other great products, but the tax-free savings plans usually aren’t that hot. There are high fees, difficult to understand investments, and the maximum amount you can save is pretty low. In addition, investing in taxable accounts is easier and cheaper than you might think as you can use your capital gains tax allowance to shelter investment growth from HMRC.

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