Income Protection (are you covered)

Most people recognise the need to insure their lives, especially to cover their mortgage and other major borrowings. Like many employers, the police service provides a valuable death-in-service benefit. Those with access to the Police Federation’s group cover can add to their life cover on attractive terms. Normally, the only reason to look beyond these 2 group schemes is when you buy a house. You probably want to take out personal life cover for the mortgage debt, and include your partner.

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Most people recognise the need to insure their lives, especially to cover their mortgage and other major borrowings. Like many employers, the police service provides a valuable death-in-service benefit. Those with access to the Police Federation’s group cover can add to their life cover on attractive terms. Normally, the only reason to look beyond these 2 group schemes is when you buy a house. You probably want to take out personal life cover for the mortgage debt, and include your partner.

But a much greater risk is being long term sick – far more likely than dying during your working life. As a nation, we are very bad at covering this risk – and police are no exception. Of course, employers will cover you in the shortterm – but not many extend this cover to the longer term. In the police service, you are liable to be placed on half pay after 6 months’ sickness, and no pay after a further 6 months. With no prospect of a recovery, medical retirement will follow – an enhanced pension, but still a considerable loss of income.

In 1997, following the introduction of Regulation 46 (now Reg 28), MPFS launched its Income Protection Plan. This is also known as Permanent Health Insurance – “Permanent” because our cover continues throughout your working life (unless you choose to cancel it). It paid out 60% of your loss of income until age 55 – that age limit is now 60. The benefit is not liable to tax.

Since that time, our claims experience has improved – largely due to the increased use of recuperative duties. We have passed the saving in cost on to our members by reducing premiums and improving benefits. We have added a critical illness benefit of £15,000 that pays out on major medical conditions, such as heart attacks, strokes and diagnosis of serious cancers. The only way in which we have tightened the cover since launch is to exclude stress and mental conditions after medical retirement.

We are now improving the benefits further. Up to three months’ pensionable pay will be paid as additional lump sum benefits as you progress onto half pay, and then no pay, and in medical retirement when you gain alternative employment. We are also improving the income paid out prior to medical retirement – e.g. you will receive 60% of insured pensionable salary during the no pay period, with no reduction for any state benefits. the income paid during medical retirement will be modified and will no longer reduce as your pension goes up.

Whilst we are in general keeping our premium rates unchanged, we have had to review our charges in the light of the EU gender directive. Income Protection claims for females are significantly higher than for males, and we must rely on national statistics published for the purpose of the directive. This will mean a 20% increase to the premium we charge for females commencing January 2009, when the improved benefits are introduced.

Finally, under our Jubilee year promotion, there is up to 3 months free cover. For policies underwritten in October to December, cover is provided immediately on acceptance, but there is nothing to pay until January. So, if you need cover, why wait?).

The mutual dividend

The Friendly Society is owned by its members – there are no outside shareholders. We have accumulated capital over the years to enable us to run the with-profits fund, in particular to invest in equities whilst guaranteeing a minimum pay-out under our savings plans. Our pay-outs nowadays are closely based on what you pay in and the return on our funds (after meeting our
expenses and tax liabilities).

But the capital we have accumulated has grown to the point where we can plough some of it back into pay-outs. We will keep this under review, but we have already committed over £2 million to this purpose, enough to lift the investment return to our members by 1% per annum over the life of their plans to date.

Hedge Funds

The name “Hedge Fund” was never meant to be racy – these funds aim to return a positive absolute return year on year by hedging away the risks. They aim to beat the return on cash by a similar amount to equities, but with more steady growth. In this sense, they strongly mirror the objective of a with profits fund.

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The name “Hedge Fund” was never meant to be racy – these funds aim to return a positive absolute return year on year by hedging away the risks. They aim to beat the return on cash by a similar amount to equities, but with more steady growth. In this sense, they strongly mirror the objective of a with profits fund.

The core investments for most with profits funds are government bonds and UK equities – and ours is no different. Other investment classes tend to have drawbacks that limit the proportion of our fund we would want to commit to them – but they provide welcome diversification – vital for spreading risks and smoothing returns. If we had too much in equities, then the pay-outs to our members would fluctuate from year to year by more than we would like.

However, last year, the usual alternatives to UK equities did not appeal. Overseas equities were not the answer - markets around the world tend to follow each other, with the US leading the way. Commercial property looked overpriced. Corporate bonds were paying a very small premium compared to similar bonds guaranteed by the UK government - this was before the market had woken up to credit risk.

So we started to look seriously at hedge funds - or rather funds of hedge funds. Again it is all about spreading risks, so

• we will only put a small part of the fund in this sector (currently we have less than 5%, but we could go up to 10%)
• we will only use funds of funds
• we will spread our investment between different funds
• we will avoid funds that go tend to up and down with the equity market

Tax Exempt Savings Plans

Friendly Societies are generally no different from other mutual insurance companies, but they have one particular tax privilege...

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Friendly Societies are generally no different from other mutual insurance companies, but they have one particular privilege. Qualifying savings contracts for up to £25 per month are tax privileged in the same way as ISAs and Child Trust Funds (“CTFs”). No tax is paid on the investment income generated (although dividend tax credits cannot be reclaimed).


To qualify, the savings contract must run for 10 years, and include a small element of life insurance. For a plan taken out with us 10 years ago, the £3,000 saved has grown to about £4,120 – without the tax break, it would only be £3,960. (Past performance is no guide to future returns.)


Taking out a savings plan with a Friendly Society does not prevent you from taking out an ISA in the normal way. Adults can choose between a 10 year plan where they have the option to leave the money in for further growth, or a longer plan which pays out on the chosen maturity date (which must be before attaining age 65, or 60 for smokers). Children can have Friendly Society plans as well as CTFs – ours is available up to age 15, so includes children born before the CTF came in (September 2002). The plan runs through to age 25 but can be cashed in at age 18 or 21 if it has been running for 10 years. Until age 18, the premiums are paid by the child’s sponsor who can be a parent, grandparent or other relative. The £25 premium limit applies to the child, not the sponsor.

Looking after you!

(view full article)Our spring newsletter went out to members with their revamped bonus notices and included a Q&A section on bonuses.That newsletter also explained the changes to ISAs, and we include a summary of key points in this issue. We were delighted that so many of you started an ISA or transferred your existing ISA to us.

.....We are regulated by the Financial Services Authority (“FSA”). The FSA are increasingly reverting to regulating through principles rather than detailed rules. A key principle is “Treating Customers Fairly” or TCF. As a mutual Society, owned by our members, we never forget we are here to serve YOU.
Many of the initiatives we have undertaken over the last couple of years, like our review of the bonus notices and the accompanying breakdown of premiums, have been aimed at the needs of our members – and these have been helpful in demonstrating our commitment to TCF.

• All our products are now explained in attractive jargon-free brochures. We are trying to get these into all the main places of work – please let us know if you do not have ready access to them, or if your supply is running low.
• We are pointing out to our members that they remain eligible for our products after they retire or leave service.
• We have allocated over £2 million of our capital to enhance with-profit pay-outs
• Information about products, bonuses and much more is given on our publicwebsite and on the MPS intranet (“Aware”)
• We are spreading our assets more widely, to reduce the amount that pay-outs fluctuate from year to year.
• We keep our protection products under review – both the benefits we offer and the price we charge
• We are seeking the opinions of our members, and now write to all new members
• Our everyday Insurance range has expanded well beyond Travel – we now also cover home and motor with online quotes, and there is a helpline – 0845 362 7288 for a wider range of products.
• We are trying to confirm the addresses of our retired members and to trace them where they are out-of-date. Please let us know if you move house – even if we write to you at your work address. If you are retired andhave e-mail, please e-mail us with your current contact details.