Don't let banks take you for a ride
The past 30 years have seen the personal finance landscape change enormously, mainly for the better as far as consumers are concerned.
Greater competition between providers and easier access to comparison tables have made is much easier to find value for money, although there is still room for improvement.
For bank customers, the key difference between today and 30 years ago is increased choice.
Then, the big four high street banks dominated. Now, with the introduction of current accounts by building societies and ex-building societies such as Nationwide, Halifax, Alliance & Leicester and Abbey, and telephone and internet banking, the field has widened massively and more than 30 current accounts are available.
One consequence of the greater competition among banks has been the introduction of current accounts paying interest on credit balances. Some now offer more than 5% for the first year, provided they are funded by between £500 and £1,000 each month.
However, although it has become easier to switch current accounts, many customers still don't bother. According to Abbey, more than half (52%) of Britons are still with the same bank they were with 10 years ago.
Yet changing banks could not be easier. Most banks hoping to attract new customers normally offer a switching service and will organise the transfer on your behalf. Under the new banking code, your existing bank is required to deal quickly and efficiently with switching requests.
But another development - packaged current accounts with fees of from £10 to £20 per month in return for various incentives such as travel insurance and breakdown cover - should be treated with caution. These accounts are being promoted heavily nowadays, but they don't always provide value for money.
On the general insurance front, the major change that has occurred over the past 30 years is the ease with which it is now possible to shop around for the best motor and home insurance deals. Back in 1979, motor and home insurance was typically bought through high street insurance brokers and people tended to stick with the same provider.
Many homeowners were sold their household buildings and contents cover by their mortgage lenders, for whom the commission was a useful source of extra income.
It was not until Direct Line came along in 1985 and started selling motor insurance policies direct over the phone, followed by household policies in 1988, that consumers realised there were cheaper deals available.
Competition among providers has intensified since then, helping to keep premiums down. Supermarkets such as Sainsbury's and Tesco have entered the market, while internet price comparison websites have made shopping around for motor and household policies even easier.
It is now common practice for motorists to compare premiums every year when their insurance policies come up for renewal, although householders tend to do so less often.
However, there are pitfalls. Some comparison sites build in relatively high excesses for motor policy quotes in order to keep premiums low. With home insurance, the 'inner limits', such as single-item limits, can also vary considerably from one policy to the next, so it is important to check you are getting the right cover.
The mortgage wheel has virtually turned full-circle over the past 30 years. Loans were not easy to get then and the credit crunch has made them more difficult to obtain now. In 1979, it was because building societies were the main source of loans and their funds were limited.
Prospective borrowers were expected to have a savings account with a society before being granted a loan. The maximum multiple of income the societies would lend was less than three times the main earner's income and the typical loan-to-value (LTV) limit was 80%.
Although mortgages later became much easier - some would say too easy - to obtain, and included 100%-plus LTV, it has become difficult once more for many prospective buyers to arrange mortgages.
Unless you have a sizeable deposit, a good salary, a safe job and a faultless credit history you will struggle to be accepted for a loan in 2009.
We have also seen the rise and fall of the endowment mortgage. In 1979, about a third of new mortgages were endowment-based. This proportion rose to around 80% in the late 1980s. Now it is down to about 5%.
Although many existing borrowers have abandoned their endowments in the meantime and switched to repayment loans, some of the original policies are still in force and coming up to maturity, which means some homeowners may face shortfalls.
Other changes that have occurred over the past three decades include the rise of the fixed rate loan, the tracker and the offset mortgage. However, tracker mortgages have proved a loss-leader for lenders recently as interest rates have dropped.
Most loans on offer are fixed rate. Although the rates are currently relatively high, taking a fixed rate now could be beneficial when interest rates start to rise again.
Competition for savings has become particularly intense, and this has been good news for savers even though, in the current low interest rate environment, they may not feel particularly well off.
Back in 1979, building societies were the main home for the nation's savings, but there was very little difference in the interest rates they paid. Most adhered to the Building Societies Association recommended rate.
This cartel was abolished in the early 1980s. When societies started to demutualise at the end of that decade, the gloves came off.
Today, there is a plethora of savings accounts on offer from a variety of institutions, ranging from foreign banks to supermarkets. The best interest rates are usually offered on postal and internet accounts.
However, even the most astute savers have to be on their toes nowadays, as many of the best-buy accounts are offered with temporary bonuses for six to 12 months, so it may be necessary to switch out of these accounts again after the bonus period.
The introduction of tax-free savings accounts has been a great boost to savers. First came tax-exempt special savings accounts in 1990, which were replaced by individual savings accounts (ISAs) in 1999.
Cash ISAs are a no-brainer for savers. The limit on how much can be deposited in these accounts is being increased from £3,600 per tax year to £5,100 from 6 October 2009 for the over-50s and from 6 April 2010 for everyone else.
Still, research indicates that many savers lose money by not regularly checking the rates they are receiving on their savings or switching accounts. Only the most active savers get the best deals.
Although Barclaycard introduced the first UK credit card in 1966 and other banks followed suit in 1972, they were not commonplace 30 years ago. However, by 1999, it was estimated that half of all UK adults held at least one credit card.
Initially, people stuck to cards issued by their banks. But then other providers started making more tempting offers.
In 1996, Goldfish launched the first UK credit card loyalty scheme, which awarded points that cardholders could exchange for money-off vouchers.
A year later Alliance & Leicester introduced the cash-back card, and in 2000 Egg launched the first 0% balance transfer scheme, which allows cardholders to switch their outstanding balances and enjoy six months of interest-free credit. Chip and PIN was introduced in February 2006 to reduce identity theft.
Last year, plastic cards accounted for two thirds of all UK retail spending. More than £126 billion was spent using credit cards in 2008. The latest figures show that outstanding credit card balances top £52 billion.
However, debit cards, introduced in 1987, now account for 75% of all card payments.
Credit cards nowadays are not a particularly cheap source of credit, with APRs often running at more than 15%. But they do provide up to 59 days of free credit and 0% introductory offers, and balance transfer deals are still available. Moves by card providers to reintroduce annual fees after regulatory crackdowns may make them less attractive in future.
The area that has possibly seen most change over the past 30 years is life assurance. In 1979, life assurance policies were promoted as a tax-efficient means of saving, as the premiums qualified for tax relief, which helped boost returns.
Although life assurance premium relief was abolished for policies taken out after 1984, with-profits endowment policies linked to mortgages continued to be sold in increasing numbers thanks to the attractions of rising bonuses, and unit-linked policies were also heavily sold by companies such as Allied Dunbar.
In fact, the main reason so many life policies were sold was because of the hefty commissions paid to life assurance salespeople, often equivalent to the first year's premiums or more.
As financial regulation increased, companies and salesmen were required to be more transparent about the amounts of commission paid and its effect on returns. The poor value for money offered by unit-linked policies became increasingly obvious and at the same time with-profits bonuses started to fall. Fewer and fewer investment-style policies were sold.
Now, life insurance has gone back to its roots and focusing on protection again. Increasing competition has brought the cost of term assurance down in recent years and the popularity of critical illness insurance has grown.
However, insurers are still trying to get away with selling overpriced products today, in the form of guaranteed acceptance on over 50s life policies.
This article was originally published in Money Observer - Moneywise's sister publication - in October 2009
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
Term assurance provides cover for a fixed term with the sum assured payable only on death. Term assurance premiums are based primarily on the age and health of the life assured, the sum assured and the policy term. The older the life assured or the longer the policy term, the higher the premium will generally be. There are generally two types of term assurance. Level term assurance premiums are fixed for the duration of the insurance term and a payment will only be made if a death occurs during the insurance period and with decreasing term assurance, life cover decreases during the insurance term reducing the cash payout the longer the term runs and this is reflected in the premium.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
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.
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.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
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.