13 financial products to avoid
Experts at consumer group Which? have identified 13 products that are a waste of money.
1. Mobile phone insurance
Almost nine million people have lost at least one phone in the past five years. It's certainly worth getting a valuable handset covered (for example, the £699 iPhone 4S). But for most other handsets, you should think twice about getting them insured: it is pricey and can cost up to £180 a year. Mobile phone insurance is often sold by shop staff with little knowledge of the product and its exclusions. You'd be better off putting your mobile phone on your home insurance, as it will provide most of the same cover (or go without insurance unless you have an expensive handset).
2. ID theft insurance and card protection policies
Many people are concerned about the security of their credit cards, bank accounts and personal details, and you may often be offered a card protection policy, costing around £30 a year or identity theft insurance, at around £70 annually.
But you don't really need it. ID theft policies often include access to your credit report, which you can get for a one-off fee of £2. You have automatic insurance from losses from fraud with no upper limit under FSA regulations - better than the standard £100,000 offered by card protection and ID theft policies. Banks usually offer a full refund if fraudsters clone your bank card and siphon off money. As far as identity fraud goes, learn more about protecting your identity here.
3. Extended warranties
Nobody wants to splash out hundreds, sometimes thousands of pounds on a new appliance, only to have it break down a few years later, leaving them to fork out for expensive repairs or even a new TV or washing machine.
But extended warranties are not the answer. Research from Which? found that a five-year extended warranty on a washing machine - with a relatively small chance of needing repair in the first five years - would cost £170, when the initial price of the appliance was only £260. Few appliances break down often, so you'd be better off saving your money in a Cash ISA, to put towards a new appliance.
4. Structured deposits
With interest rates still at a record low, savers are looking for anything to get them a decent rate on their nest eggs. Banks and building societies have come up with a solution - structured deposits. These link the rate of interest you could get over a three to six year period to the performance of the stock market, and guarantee to pay you your money back in full at the end if the market hasn't performed well.
But the Which? experts think they are a poor half-way house between saving and investing, have complex terms, opaque charges and rarely deliver the maximum advertised returns.
5. Absolute return funds
An absolute return fund is an investment product that aims to make a positive return, no matter what the conditions of the financial markets, even making a profit when markets fall. They attempt to do this using complex financial tools and a method called short selling.
But the concept has turned out to be too good to be true in many cases. The Financial Services Authority recently issued a misselling warning, arguing that even financial advisers may not fully understand these products so consumers are unlikely to understand their complexities.
"For example, consumers may believe there is an element of capital protection, or guarantee of a positive return," the FSA said in its Retail Conduct Risk Outlook last month. The City watchdog reported that 51% of absolute return funds failed to make a positive return, while 33% failed to beat inflation last year.
6. Payment Protection Insurance (PPI)
The problems with the controversial insurance - the latest major misselling scandal in the banking world - are well documented. The past decade has been characterised by widespread mis-selling of PPI alongside other financial products like credit cards or bank loans to people who couldn't claim or didn't even know they had the product.
If you think you may have been mis-sold PPI, you can use the free Which? PPI complaint tool to put in a claim. If you haven't already considered it, read the guide to a much more useful protection product, income protection insurance. It is designed to provide you with a regular tax-free income if you can't work because of illness or disability. The benefit paid is up to a maximum percentage of your earnings – often 50% or 60%.
7. Claims management firms
If you've been mis-sold PPI, put in a claim yourself, rather than employing a claims management company. After all, there's no point in handing over a quarter or more of your PPI refund to a firm when you could easily make the claim yourself. With some CMCs, you could even end up paying out more in fees than you receive in compensation.
The financial ombudsman has warned that some £50 million of the compensation for mis-sold PPI paid out this year will go to claims management companies unnecessarily. Making a claim through a CMC does NOT increase your chances of a payout.
8. Over 50s plans
Over 50s plans are designed to give your loved ones a payout after you die, to cover funeral costs. But they're actually really poor value and will almost always leave you worse off if you take one out. A 60-year-old could pay in more to a cash ISA than he could get back from an over 50s plan if he died at the age of 73. The longer he lives, the worse value his plan becomes. Worse still, if he stops paying into his plan at any stage (up until the age of 90), he will lose any future payout.
9. Debt management plans
Fee-charging debt management companies negotiate with consumers' creditors on their behalf, but offer poor value for money. They generally target people who are in serious financial trouble.
The firms sell themselves as a last resort rescue option. The fees these firms charge typically equate to around 17% of a customer's monthly repayments. Some companies are offering high commission payments to other companies for receiving referrals. You're much better off contacting a debt charity, like the Consumer Credit Counselling Service.
10. Task-based income protection cover
If you're buying income protection, always look for a policy that will pay out if you're unable to do your own job or a similar one. Some policies instead base their payout decision on whether you're able to do a certain number of daily tasks, such as dressing yourself or walking a particular distance. We don't think these policies are good enough.
11. Store cards
Like shopping at a particular retailer? You might get offered a big discount on that day's purchase if you take out a store card, but think twice - store cards have ultra-high interest rates and a number of tricky terms and conditions that could leave you paying back much more over time than the new dress you wanted to buy.
Your best bet is using a reward or cashback credit card - this way you'll still get a little extra when you spend, but won't face huge interest payments. Compare and save has a round-up of the best reward cards, and Moneysupermarket.com has also done one.
12. Payday loans
Short of cash? Borrow £100 and repay £125 a month later. Ads for payday loans have been popping up all over the place, on billboards, the internet and TV.
However, the interest rates on these loans are over 1,000% and you will struggle to pay them back. As an alternative, look to borrow from a credit union, which caps annual interest at just under 30% - still high but much better than the extortionate rates charged on payday loans. Avoid falling into a vicious cycle whereby you have to borrow more and more money just to pay off the interest.
13. Water pipe insurance
Water companies heavily market supply pipe insurance as a necessity, to protect you if the water pipes outside of your home burst or suffer damage. The reality is that you're often covered by your home insurance and even the water companies. At £35 a year, this type of insurance is not worth having.