Fight for your money
When it comes to our everyday financial products and services, we’re too easily taken for a ride. Credit card providers rake in billions by tweaking their terms and conditions, mortgage lenders confuse us with complex products, while insurers flog us policies that we then struggle to claim on.
The easiest option is just to pay up and shut up, and that inertia is what providers count on – they know that most of us, even if we grumble about high costs and poor service, will not take action to find a better deal.
But enough is enough: with Axa estimating that 11.6 million of us are struggling to cope financially, there could not be a better time to mount a fightback. A few simple steps such as switching your savings account, shopping around for an annuity or saying “no” to inadequate insurance could save you thousands of pounds.
Switch utility provider
It’s estimated that last year’s increases to the price of gas and electricity added an extra £300 to our average yearly bills. But although you can’t do anything about rising power costs, you should never be paying more than you need to.
“The gas and electricity industry is a very competitive market,” explains Tim Lyons, energy expert at uSwitch.com. “But by switching providers, you could save up to £325 a year.”
To make sure that you aren’t paying over the odds, take a look at comparison websites such as Interactive Investor or the theenergyshop.com. Simply enter some details, such as your postcode and how much you spend on energy each year, and the search facility will supply you with the cheapest tariffs in your area.
You can also lower your bills by buying your gas and electricity from the same provider, paying by direct debit and managing your plan online.
Credit and store cards
An estimated 12 million of us regularly use a credit card, but you can leave yourself open to being short-changed if you use an inappropriate one. So, before you start using your card, make sure it’s right for you.
For big spends, always choose a card with a 0% interest introductory period on purchases and make sure you pay off your balance in full by the end of the interest-free period.
If you have a big balance to pay off on an existing credit card, it could be worth transferring your debt to a 0% balance transfer card. While you often have to pay a balance transfer fee this is generally much less than the amount you would have paid in interest if you had stuck with your current card.
Just remember to leave the card at home when you hit the high street – the rate on purchases on 0% balance transfers is often high.
The most expensive type of credit card you can use is a store card. No matter how mouthwatering the discount may be when you sign up, Moneyfacts’ data shows the average store card APR is over 25% – a hefty amount if you’re not sure you can pay the balance off at the end of the month.
Credit card cheques are another money spinner for the credit card industry. These can be used like ordinary cheques, but instead of coming in books they are often sent unsolicited by your card provider. But as soon as you hand one over, interest, at the higher ‘cash advance’ rate, starts mounting up because there is no interest-free period.
Research by uSwitch.com found that the average rate on a credit card cheque was 26.63% – 9.4% higher than a standard credit card’s APR of 17.23%. “Credit card cheques are a notoriously expensive way to borrow,” says Louise Bond, a personal finance expert at uSwitch.com.
If you want to hit your bank where it hurts, then your current account should be top of your list. Research by moneysupermarket.com shows that the average overdraft rate has risen by 1.11% over the past 12 months – to 11.82%.
Meanwhile, if you go into the red without permission, you can expect to pay fees of up to £30 a day. To add insult to injury, the majority of current accounts pay a mere 0.10% in interest on your balance if you stay in credit.
However, you can avoid hefty overdraft fees and earn good interest on your balance if you’re not afraid to make the leap and switch banks.
“Banks hate losing their customers,” says Andrew Hagger, spokesperson for Moneynet. “But loyalty counts for nothing when it comes to your current account, so it’s crucial you choose one that best suits your spending habits.”
For example, if you find yourself constantly in the red, you should pick an account that doesn’t charge you hefty overdraft fees. Or if you have a lots of money in your current account, then choose one with a competitive interest rate.
When choosing a savings account, it hardly ever pays to remain loyal to your old bank. You could be far better off if instead you review your account on a yearly basis and pick the most competitive rate.
When it comes to choosing a mortgage the variety of deals on offer, with differing rate and fee combinations, makes it tough to find the one that is best for your budget.
“Lenders offer low rates and attach high fees or higher rates with lower fees, while some apply percentage fees of up to 2.5% of the total mortgage amount,” says David Hollingworth, a mortgage broker at London & Country.
“But no two borrowers are ever the same. So to avoid paying over the odds, you need to work out what combination suits your budget best.”
Hagger adds: “The best deal for you will depend on how much you want to borrow and how much you can afford – not necessarily on the interest rate. Don’t just rely on best buy tables; seek the advice of an independent financial adviser or mortgage broker before you choose a product.”
Life, they say, is full of surprises – that’s why insurance has become a multi-million pound industry. But, if you fail to tell your travel insurer about any health problems, your car insurer of any motoring convictions or leave your home open to opportunistic thieves, your insurance will be null and void.
According to the Association of British Insurers, we paid approximately £32.9 billion in insurance premiums in 2007 – but only £15 billion was paid back in claims. Malcolm Tarling, from the ABI, says: “The key to any successful insurance claim is to be honest, provide clear and concise information, and show a duty of care at all times.”
Always make sure you read the small print before you choose your policy. Also, beware of insurance linked to your current account. According to Defaqto, about eight million of us pay about £120 a year for a packaged current account – often paying simply for the perks attached to it.
Unfortunately, the travel insurance included in this package might not cover more than two trips a year, or apply to the destinations you wish to visit or the activities you have planned when you’re there, while the car breakdown cover may not cover you more than a certain distance from your home.
“You need to think carefully about what the special deals are, whether you will use them, and if you do, whether you can buy them more cheaply elsewhere,” says David Black, head of banking at Defaqto.
With expectations that money will be tight this year, insurance that could help to keep your head above water if you were made redundant or become unable to work because of an accident or illness should be worth its weight in gold. However, that might not be the case.
Payment protection insurance, for example, is designed to cover your mortgage, credit card or loan repayments for a limited period should you be unable to work for the reasons above. However, figures from the Competition Commission show that 90% of PPI policies go unpaid, because of significant exclusions buried deep in the small print.
“Most policies won’t pay out if you’re self-employed, aged 65 or over, or out of work because of stress or back pain,” warns Teresa Fritz, a principle researcher at Which?. “In fact, more than 25,000 PPI-related complaints were made to the Financial Ombudsman last year."
If you feel you have been mis-sold PPI, you could get a refund on your premiums, plus any money you’ve missed out on through interest.
Other protection insurance products have also faced criticism. Critical illness insurance, for example, which is designed to pay out a lump sum if you’re diagnosed with a serious condition, sees nearly one in five claims rejected because the illness is not regarded as severe enough or if the insurer deems that you have failed to mention something on the application form.
If you want protection insurance, the trick is to shop around for the best deal and read the small print carefully before you sign on the dotted line. A protection specialist should be able to find the best deal to suit you.
When you come to retire, an annuity will provide you with a guaranteed income for the rest of your life. However, Laith Khalas, a pensions analyst at Hargreaves Lansdown, warns that too many people miss out by simply sticking with their standard offering from their pension provider.
“Buying an annuity is a one-off decision that will be set for the rest of your life,” he says. “But you are under no obligation to stick with your pension provider. With the so-called open market option you can get up to 20% more income simply by shopping around.
Yet almost 60% of retirees simply tick the box accepting whatever their pension provider offers them. And the moment they do so, their retirement income is reduced.” This is because once you’ve chosen your annuity you are not allowed to switch to another one.
The difference between the highest and lowest paying annuities is clear. For a 65-year-old non-smoking male, a £50,000 single-life annuity from Scottish Widows would be worth £254 a month, while Standard Life would pay out £307 – that’s a difference of £636 a year.
Smokers or those with health problems could make even bigger savings by shopping around as they could be eligible for an enhanced annuity offered to people with a shorter life expectancy.
A 65-year-old male smoker with a £50,000 pension pot could be left £1,464 worse off each year if he doesn’t take a few minutes out to search out the best enhanced rate. You can find the best annuity rates on offer by visiting the Financial Services Authority's independent comparison tables.
Poor investments offered by banks
While the majority of investors’ portfolios have taken a real knock over the past few months, if you have an investment plan with your bank, you could be nursing even heavier losses. “Investments offered by banks generally tend to underperform,” says Darius McDemott, managing director of Chelsea Financial Services.
“Abbey’s UK Growth, Halifax’s Special Situations, and HSBC’s Income funds are consistently poor performers.”
If you had invested £3,600 five years ago in the Halifax Special Situations fund, you would have lost £230.40, compared with the average UK All Companies fund’s return of £216. However, if you had invested in a top-performing fund, such as Rensburg UK Mid Cap Growth, you would have seen a massive £1,756.80 return over the past five years (to January 2009).
“Always give your bank a wide berth if you’re serious about investing,” says McDermott. “You can find much better funds by using a discount broker. ”
Beat the Taxman
The taxman can’t get his hands on the interest on your savings if you have an individual savings account. You can squirrel away up to £3,600 each year into a cash ISA, and up to the full £7,200 allowance into a stocks and shares ISA minus any money you have in a cash ISA.
You can also reduce how much the taxman gets when you die. Inheritance tax of 40% is due on estates worth more than £312,000 (2008/09), so put your plans in place early if you don’t want to leave your loved ones with a hefty bill.
You can lower the size of your estate by making gifts during your lifetime. For example, up to £3,000 can be gifted away each tax year, and up to £5,000 to someone who is getting married or entering a civil partnership.
You can give larger gifts, but they only escape IHT if you survive for seven years after giving the money away. You can also shield your assets by using a trust. This is complex and will depend on your personal circumstances so it’s best to seek professional advice from an IFA, trust specialist or solicitor.
And don’t forget the tax relief on personal pensions. For every pound a basic-rate taxpayer pays, the provider will reclaim 20p from the government, which means it costs just £80 to pay £100 into your pension pot.
If we all used our universal pension contribution allowance, it is estimated it would cost the government £21.5 billion a year.
Know your rights
If you think you’ve been mis-sold an insurance policy, or feel ripped off with a poor product, you don’t have to suffer in silence. Your first step towards claiming compensation is to contact the company involved by phone or letter to register your complaint. Remember to keep all copies of all correspondence, and the names and details of anyone you speak to.
Download our template letter to help you reclaim PPI your premiums.
You have to give the company eight weeks to put things right. If your complaint has not been resolved within this time – or you’re unhappy with the decision – the ombudsman can help. It’s the ombudsman’s job to settle disputes between providers of financial products and services and their customers in an impartial manner.
How long it takes for your complaint to be resolved will depend on how complicated it is and how quickly the ombudsman can get to the facts. You will have to send copies of all the information about your complaint, and, whatever the outcome, you will receive a letter informing you of the final decision.
For financial product complaints contact the Financial Ombudsman (0845 080 1800) or for energy-related complaints contact the Energy Ombudsman (0330 440 1624).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.