The taxman can't touch this piggybank

Friendly societies, which first saw the light of day in the 17th century, were set up to provide sickness protection for workers. Their expansion in Victorian times owed much to the ethos of self-improvement so strong among skilled artisans, coupled with the knowledge that without self-protection, workers were likely to become destitute if they fell ill.

Many older societies are still committed to their traditional market. But both they and newer societies, 109 in all, have expanded into the field of tax-exempt savings plans.

The plans they offer are similar to those offered by life companies. Unlike them, they have the extra benefit that returns roll up annually on a tax-free basis. In addition, they can be put to a variety of uses.

The maximum payment attracting tax-free returns is pounds 25 a month or pounds 270 a year. Alternatively, a lump sum of pounds 2,700 will buy a 10-year plan. The amounts were raised in May last year from a previous monthly maximum of pounds 18.

Despite their high charges, the better ones have outperformed building society high-interest accounts and can hold their own with the best of the life offices even before the tax perks.

Money Management, a financial magazine, lists Tunbridge Wells Equitable in third place and Scottish Friendly in ninth place among the top 10 savings providers of the past decade.

Tunbridge Wells showed a net yield, after charges, of 11.36 per cent a year on a 10-year plan maturing in January 1996, on payments of pounds 50 a month.

Unlike personal equity plans (PEPs), which are not available to the under- 18s, any child is entitled to start up a friendly society "baby bond". These plans are popular with grandparents as gifts on the birth of the baby, as they can have maturity dates of 10, 15, 20 or even 25 years ahead.

Lump sum payments, however, cannot come from tax-paying parents if they are to be treated as the child's tax-free income. Such a problem does not arise if payments are made by regular premium, or by lump sum, from a grandparent.

Lump sum payments can also attract discounts. Scottish Friendly gives pounds 405 off the pounds 2,700 tax-free maximum at the start of a 10-year plan. Tunbridge Wells gives discounts according to the tax status and, to a lesser extent, the planholder's age.

A child or other non-taxpayer would need a lump sum of pounds 2,284.90, but a higher rate taxpayer aged 30 would pay pounds 2,426.27.

Friendly societies are useful to less wealthy investors. They are happy to accept monthly premiums of pounds 10 - well below the minimum for nearly all unit and investment trust PEPs.

New products are also being devised to make use of their tax advantages. Tunbridge Wells has recently launched an endowment plan for mortgages.

A couple paying pounds 70 a month for the endowment could make use of the tax- free growth on pounds 50 of the contribution (pounds 25 each) and top up with pounds 20 of taxable contribution. There is only one policy charge despite the split payments. Because returns can roll up free of tax, the endowment should outperform standard life policies.