What a waste: 10 financial products to make you scream
In these dark economic times, banks and insurers are keener than ever to get you to part with your cash. But a lot of what's on offer could leave you out of pocket. Kate Hughes reports
Sunday 29 March 2009
Money is tight and getting tighter. Some financial products will help you through tough times, protecting you if you lose your job or fall ill, perhaps, or offering fair rates on savings. But then there are the products to avoid – the ones that snatch your hard- earnt cash and give you precious little in return.
Here is a run-down of the 10 financial products that should set the alarm bells ringing, and the better alternatives which are available.
Payment protection insurance
PPI is currently facing a huge mis-selling scandal, and it's easy to see why. The product is sold against all sorts of debt, from mortgages to personal loans, and promises to cover your payments if you become unemployed, have an accident or fall ill. It sounds like a great idea, but the cover is only for the repayments on that particular loan, and lasts one or two years. The price of single-premium PPI is usually added on to the loan, so you pay interest on it as well, while the cover is expensive and there is evidence of sales people purposefully misleading customers. A far better alternative to PPI is an income protection policy, which also covers you against accident, sickness or unemployment, but will pay out a proportion of your entire income until retirement if necessary.
Another product constantly in the spotlight, with-profits seem to offer a very low-risk investment through a process known as "smoothing" – holding back money earnt in good years from stock market returns to cover the bad years. Between 10 and 20 million people hold a with-profits investment – via, for example, endowments, pensions and annuities – but due to high charges and poor performance, returns are now often lower than savings account rates.
"It's difficult to get out of these policies because of the penalties involved," says Martin Bamford at independent financial adviser Informed Choice. "Instead, create a diversified investment portfolio with exposure to all asset classes."
Unexpected veterinary bills can be huge, so insuring your cat or dog for a few pounds a month seems an easy decision. But there can be significant problems with this type of cover and increasing numbers of policyholders are seeking help from the Financial Ombudsman Service. Many policies don't cover health problems common among certain breeds, and impose an upper age limit of just seven years. Even the policies that aren't so restrictive can be prohibitively expensive.
The alternative to insurance is to put away the amount you would otherwise have paid in premiums into an instant access savings account.
Healthcare cashback plans
Even if you don't go private, medical treatment can be expensive – as anyone who has had to splash out on dental work, eye tests and prescriptions, say, can testify. Take out a healthcare cashback plan and, for your monthly fee, the provider will refund part of the cost if you have to pay for dental or optical care – but not much else. While that's fine if you spend a lot on this type of healthcare, and could offer savings, think carefully about buying into one of these schemes if your health needs are more varied.
Alternatively, private medical insurance is more expensive, but covers you if you fall ill or need medical treatment. A PMI policy will foot the bill rather than paying you back some of the costs.
When buying goods such as TVs, washing machines or stereos, you will probably be offered an extended warranty on the product, which covers the cost of repair or replacement if things go wrong. But household products have a manufacturer's guarantee anyway, and the cost of the cover is often expensive. If you want an extended warranty, bear in mind that you don't have to buy the one that the retailer offers. "It is now also possible to buy warranties that cover a number of appliances, such as all the electrical equipment in your kitchen," suggests Consumer Direct, the government-funded consumer advice site.
Individual voluntary arrangements
IVAs offer consumers the chance to escape crippling debt by employing a company to negotiate for you to pay a smaller amount and stop future interest charges. It's another brilliant idea – except for the fees.
Those people who are already struggling with insurmountable money problems are being charged upfront by middlemen to deal with their creditors (while others recover huge fees from the creditors). But debt charities like the Consumer Credit Counselling Service do this for free.
So why pay a debt-management company, adding to your money woes, for a service that a not-for-profit organisation can offer you genuinely free of charge, along with impartial assistance, and achieve the same thing?
The theory behind equity release is that you sell part of your home in return for cash, and carry on living there, for the rest of your life if you wish. These schemes come in two varieties: either you sell the property or part of it and stay there, usually rent free, or you take out a loan which is repaid when the house is sold.
"The problem is that these schemes are usually incredibly expensive and you only get mere fractions of what the house is worth back,"warns Martin Lewis at advice site Moneysavingexpert.com. "Even those people with no heirs are giving up a huge chunk of their accumulated wealth to have some extra cash now. The easiest, most cost-effective way to release cash from your home is to downsize."
Card protection plans
At first glance, these policies look like another good idea. For a premium as small as as £10 or £15, all your cards can be cancelled with a single phone call if they are lost or stolen. You are insured against around £1,000 of fraudulent use before you register the loss, and as much as £50,000 after the notification. The policies can also offer a cash advance or travel ticket replacement if you're away from home.
But the chances are that you are already covered anyway. Once you have registered the loss of a card, you are no longer liable for any fraudulent transactions, and the retailer and bank thrash it out between themselves. Meanwhile, travel insurance policies usually cover tickets and lost cash up to a fairly generous limit if they are stolen overseas.
Packaged current accounts
High-street banks are keen to wean us off free accounts and on to ones with a monthly fee. To do this, they offer a number of extra facilities for premium account holders, including free travel insurance, discounts on services from the bank and preferential rates on savings. Fees are anything upwards of £5, usually around £15 a month. If you don't take advantage of these services – perhaps because you have already paid for them elsewhere – the fee won't be worth it and you will be better off with a no-frills free current account.
They may look like normal credit cards, but store cards can also offer you discounts on purchases, as well as the temptation to pay off the debt at a later date. Don't do it. They are hideously expensive, typically charging 25 per cent interest or more on your outstanding balance, despite the plummeting Bank of England base rate. Furthermore, you can only use them with that retailer or its partners, while these cards will also track your purchases, gleaning information about your shopping activities and habits.
They aren't to be confused with credit cards linked to supermarkets such as Sainsbury's, Tesco, Marks & Spencer and others, which offer interest rates and conditions in line with other credit cards.
Avoid store cards altogether. The incentive discounts may seem appealing, but unless you are extremely disciplined, you will end up paying for them many times over in interest. If you can't buy what you want with money you actually have, rather than on credit, wait until payday or just don't buy it.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Liam Neeson's Downton dreams
Thriller is set in the secret world of British espionage
Bomber jacket worn by Mary Berry sells out within an hour
- 2 Scottish independence: What you shouldn't tweet about if you want to avoid jail today
- 3 Scottish independence: Five reasons Salmond is secretly hoping for a 'No' vote
- 4 Isis plan to 'behead random member of the public' in Sydney thwarted by Australian police
- 5 Archbishop of Canterbury admits doubts about existence of God
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Scottish independence referendum: A nation divided against itself
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Scottish independence: The Queen breaks silence on referendum debate – as think tank warns of £14bn black hole if Scotland votes Yes
Portuguese academic says British are 'filthy, violent and drunk'
iJobs Money & Business
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...
To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...
Up to £90,000 + benefits: Saxton Leigh: Credit Risk Audit Manager required to ...
Day In a Page
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000