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Regular Savings Plans
“Raindrops keep falling on my head.” Hal David and Burt Bacharach
I suspect saving will come back into fashion now that mortgages are not so easy to come by. As a nation, we save less and less each year – this cannot go on. Government too has been sucked into excessive spending rather than putting aside something for the inevitable rainy day.
Some of us tend to save for life’s pleasures – others borrow. I have always believed in having a rainy day fund and, at MPFS, we have provided such a fund for many members over the last 60 years. Like most mutual firms, our with-profits fund ploughs back all profits into the return we give to our members.
For some the discipline of saving is easier if they do not have ready access to their money, and commit to a fixed term endowment savings plan. For others, flexibility is important and we can accommodate them too, especially with our ISA savings plan. And if you have to cash in early, it is our policy to pay a fair exit or surrender value – but you get the best from an endowment plan by holding it to its intended maturity date.
You probably know the tax advantages of an ISA but what about endowment savings plans? Once upon a time, the government subsidised the premiums and they used to be a popular way of repaying a mortgage. But nowadays an ISA is a better way of paying off an interest only mortgage.
The government still encourages “qualifying” endowment plans, however – and there are no premium limits. If an endowment savings plan is taken out for 10 or more years, then the proceeds at maturity (or on surrender if held for at least 10 years) are not subject to tax. The fund in which they are invested will have paid tax at the basic rate, but you have no additional liability to tax even if you pay tax at the higher rate.
Better still, the first £25 per month saved with a Friendly Society qualifies for tax-exempt status. That means we pay no tax on that part of our with-profits fund. We give this tax saving back to our members in the form of higher bonuses. For a tax-exempt plan taken out in 1998, where you saved £3,000 with us over a period of 10 years, the extra bonuses increase the maturity pay-out from £3,960 to £4,120. What we achieve over the next 10 years depends on future investment performance, but the tax break will still add to the return.
Article submitted by Stuart Bell
Chief Executive at Metropolitan Police Friendly Society (MPFS)
