13 unlucky financial products to avoidPoor value products that could leave you worse off
13 April 2012
Friday 13th is upon us, and nobody wants to have an unlucky experience, both in life and in the financial products they buy. But there are an abundance of products that deliver poor outcomes and could potentially waste your money, and are well worth living without.
Here, Which? reveals the 13 'unlucky' financial products, and why you would be better off without them.
13 'unlucky' financial products to avoid
1. Mobile phone insurance
Almost nine million people have lost at least one phone in the past five years. For those with a valuable handset (the top-end iPhone 4S costs £699, for example) it's a good idea to get it covered.
But mobile phone insurance is very expensive, costing up to £180 a year, and 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.
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, costing around £70 annually.
But we don't think you 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 - this is far less than the standard £100,000 offered by card protection and ID theft policies. Learn more about protecting your identity from fraud.
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 you to fork out for expensive repairs or even a new TV or washing machine.
But Which? research found that 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 we 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 reported that 51% of absolute return funds failed to make a positive return, while 33% failed to beat inflation in the year to 1 January 2012.
6. Payment Protection Insurance (PPI)
The problems with PPI are well documented. The past decade has been characterised by widespread mis-selling of PPI to people who couldn't claim or didn't even know they had the product and has unfairly damaged the reputation of the whole protection insurance sector.
If you think you may have been mis-sold PPI, use our free PPI complaint too to put in a claim. If you haven't already considered it, read our guide to a much more useful protection product, income protection insurance.
7. Over 50s plans
Over 50s plans are designed to give your loved ones a payout after you die, to cover funeral costs. But we think they're really poor value and will almost always leave you worse off if you take one out. We worked out that 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 age 73 - a likelihood given lif expectancy is now over 80 for men.
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.
8. Debt management plans
Debt management companies negotiate with consumers’ creditors on their behalf, but offer poor value for money. Fee-charging debt management firms 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. We are also concerned that some companies are offering high commission payments to other companies for receiving referrals. You're better off contacting a debt charity, like CCCS, instead.
9. Claims management firms
If you've been mis-sold PPI, put in a claim yourself using our free PPI tool, rather than employing a claims management company (CMC).
After all, there's no point in handing over a quarter or more of your PPI refund to a CMC when you could put in the claim yourself. With some CMCs, you could even end up owing more in fees than you receive in compensation.
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 one particular retailer? If you're offered a discount if you take out a store card, think twice - they have ultra-high interest rates and a number of tricky terms and conditions that could leave you paying back much more 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.
12. Payday loans
Every day, more and more adverts for payday loans are cropping up on billboards and TV. Short of a bit of cash? Borrow £100 and repay £125 a month later.
However, the interest rate on these kinds of loans is over 1,000% and it's the most financial vulnerable, who may be unable to cope with repayments, that are likely to be tempted by payday loans. As alternative, look to borrow from a credit union, which caps annual interest at just under 30%.
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 well worth avoiding.
Watchdog not lapdog campaign
We believe that the financial regulator should be responsible for putting a stop to poor-quality financial products, which is why we're launching our new 'Watchdog not Lapdog' campaign.
At the start of next year, the current regulator, the Financial Services Authority (FSA), will split into two new authorities:
- The Financial Conduct Authority (FCA), which will have responsibility for protecting consumers
- The Prudential Regulation Authority (PRA), which will focus on maintaining financial stability
We want to ensure that the FCA puts consumer protection at the heart of everything it does – and make sure it becomes a watchdog that keeps the financial services industry in check, not a lapdog that panders to it.
- The Which? Money Helpline - we'll help if you have any queries about financial products and services
- The Watchdog not Lapdog campaign - we explain what our new campaign is trying to achieve
- Support our campaign - sign up to the Watchdog not Lapdog campaign