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.