David Prosser: Beware: extended warranties could give you a breakdown

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The Independent Online

The Office of Fair Trading hopes new rules on extended warranties will put a stop to one of the longest-running con-tricks in the retail book. Since Wednesday, shops selling electrical goods from washing machines to computers have had to give much clearer information about the cost of this insurance.

However, while it's good news that shoppers will now be better informed about warranties - they have also been granted stronger cancellation rights - the more fundamental issue is whether it is ever worth buying these expensive policies.

The insurance, a huge moneyspinner for retailers, covers customers for a set period after their standard one-year guarantee expires. Shops sell the cover with shock stories of the expensive bills customers could face if appliances break down. But independent research shows the odds are stacked in favour of those who gamble on being better off without an extended warranty.

Five years of cover for a £300 washing machine might cost as much as £150 at some retailers. Yet the Office of Fair Trading (OFT) says the average washing machine repair costs no more than £60. In other words, to be better off with the insurance, your brand new washing machine would typically have to break down three times in the next five years. In fact, the OFT says there is just a one-in-five chance of such a machine going wrong once within five years of purchase. And if retailers are claiming a product is this unreliable, do you really want to buy the thing in the first place?

The chances of other appliances breaking are even smaller than with washing machines. For example, consumer group Which? recently published research showing that there is just a 3 per cent chance of a DVD player going wrong within three years of purchase.

Of course, despite these figures, some people will be happy to pay for the peace of mind a warranty offers, even if they never need to claim. But if you fall into this category, consider the case of thousands of customers who bought extended warranties from the Powerhouse retail chain in Scotland.

These customers' warranties turned out to be almost worthless. Those who needed to claim on their insurance had to fight a two-year legal battle which only concluded in December, with pay- outs of just 28p for every pound they were owed. This sort of scandal should no longer happen because since the start of this year, sales of insurance policies have been regulated. This protection gives policyholders access to compensation when things go wrong. Sadly, one small sector of the industry is excluded from the new regulation - electrical retailers selling extended warranties are not covered.

At best then, extended warranties are an expensive bet that the swanky new appliance you've just bought is a piece of junk that's likely to break down. At worst, the insurance is a complete waste of money that will turn out not to be worth the paper it's written on when you need to claim.

If you do want protection, find out what cover you already have on insurance such as home contents policies - some credit card providers offer free cover. Alternatively, consider buying extended warranties from independent firms such as Warranty Direct or WarrantyEx. These won't necessarily offer better value, but at least they are properly regulated.

* The buy-to-let sector has all the hallmarks of a classic bubble. Savers worried by poor returns on the stock market have been flooding into bricks and mortar, despite the unsustainable price increases of recent years. Property has become the latest sure thing.

Too many investors have not thought buy-to-let through. For example, they would be unable to pay the mortgage if they struggled to find tenants. Or they have bought at the top of the market and would have to accept a loss in the event of being forced to sell.

This is not to say house prices are set to crash. And there's no doubt buy-to-let can be a good long-term investment opportunity. Just don't bet the house.

Don't be bribed into waiting for your pension

Think twice before taking advantage of Government incentives designed to encourage you to defer taking your state pension.

People who reach the state retirement age - currently 65 and 60 for men and women respectively - have for some time been allowed to put off drawing their state pension. In return, they get a higher weekly rate when they do start taking the money.

But on Wednesday, the Government began pitching a more generous offer - lump-sum payments of £30,000 or more for pensioners who defer.

Ministers are keen to persuade more people to work later in life, as part of solutions to the pensions crisis. But figures from the Pensions Policy Institute (PPI), an independent think-tank, show that the offer of a cash lump sum (paid at the end of the period of deferment) may be much less generous than it first appears.

It points out that if you don't need your state pension when it falls due, the alternative to deferral is to invest the cash each week in a savings account.

A 65-year-old man who is entitled to a pension of £105 a week would get a Government lump sum of £32,306 in return for deferring for five years. But drawing the money and depositing it in a decent savings account would produce £31,115 - only £1,191 less.

In other words, the price for the flexibility of having pension cash at your disposal is pretty small. For many people - anyone who is absolutely sure they will have no need of their state pension, even in an emergency - this price is likely to be worth paying.

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