Friday, 20 April 2007

The Ten Best Financial Products

By Neil Faulkner 19 April 2007

Simple things are what we want. Fools -- court jesters -- have always been seen as simple creatures on the surface, but with a hidden cunning. Motley Fools would do well to learn from this. Simple financial products are the best.
So I could easily fill this list with the most basic of products. I don't want to do that though, because it's boring, so here are some of the more interesting ones that even Fools should consider.

1. Cash ISAs
If you have savings and you still don't have a cash ISA, there's a good chance you're not optimising your finances. You can save up to £3,000 a year in a cash ISA, and this will go up to £3,600 from April next year.
Any interest you earn is tax-free. With a decent savings account you might get around 6% at present, but after tax this means 4.8% for a basic-rate taxpayer and 3.6% for a higher-rate payer. However, you can get cash ISAs paying around 5.5%. With no tax deducted, you'll have more pounds at the end of the year.

2. Shares ISAs
If you want to invest in shares, doing so using a share ISA wrapper is the most tax-efficient way to do it. You can invest up to £7,000 a year. (This goes up to £7,200 from April next year.) No matter how big your pot grows, you won't pay any capital gains tax either, which is usually 40%, nor will you pay any income tax.
> Learn more about cash and share ISAs: read
ISAs And Investment Funds.

3. Index trackers
The phrase 'index trackers' fills me with a warm glow. I like these things. They are so average. And when it comes to investing in the stock market, average is good!
Index trackers follow the stock market. They are very cheap, because there are no fund managers. Instead, computers buy the shares for you.
Over the long term, shares have performed better than cash that's earning interest. Consider the stock market's performance over the past 130 years. In the 131 rolling five-year periods from 1869 to 2004, shares have beaten cash 76% of the time. Over the same period there are 126 rolling ten-year periods. Out of these, a whopping 93% of the time shares have beaten cash.
Furthermore, index trackers beat funds managed by humans an incredible 8 or 9 times out of ten. Stupid humans!
> Read more about the performance of shares vs. cash in
This Is A Tracker's Market, and read about index trackers in Introducing The Index Tracker.

4. Exchange Traded Funds
If I try to explain how these work it'll come across as very complicated. Because it is. But the important bits are simple. Exchange Traded Funds (ETFs) are all index trackers. Whoopee! However, instead of giving your money to a fund, ETFs are listed on the stock market, so you buy them directly, just like shares. They easily work out as cheaply as index trackers, and often even cheaper. Plus, you can avoid paying stamp duty on shares when you buy.
>
Exchange Traded Funds in our Fool School guide.

5. Lifetime balance-transfer credit cards
I'm very wary about suggesting that a credit card is a top financial product. Credit cards cause so much debt misery through misuse and nasty small print. They are not good products for so many millions. However, used wisely they can be a good friend.
A lifetime balance-transfer card is a great way for many people to borrow. Constantly switching your debts between 0% cards is seen as the cheapest way to borrow, and usually this is correct. However, that's a lot of hassle, so, instead of constantly applying for credit cards, you could just get one with an excellent rate of interest. We wrote about these cards in detail recently in
Pay Off Debts At 3.9% A Year.
But please, use your credit cards with caution! Heed the warnings in:
Seven Reasons To Fear Credit Cards and Seven More Reasons To Fear Credit Cards.

6. Family income benefit
If you have a partner or children who depend on you, you'll probably want some sort of protection in place if you were to die early. Most people usually get some form of life insurance.
Life insurance pays out a lump sum when you die. However, will your dependants need a whopping great lump sum? In fact, will they even know how to invest it so that it lasts as long as it's needed?
One alternative is family income benefit (FIB). This pays out an agreed, tax-free monthly income to your dependants for a fixed period of time. What's more, it's usually a great deal cheaper than life insurance! So, when you're getting a
quote for life insurance, consider family income benefit instead.
> Read more about
life insurance and family income benefit.

7. Healthcare cash plans
Rather than buying full blown medical insurance (otherwise known as 'health insurance'), you can meet the cost of everyday healthcare expenses with a much cheaper product: the healthcare cash plan.
Comprehensive medical insurance policies can add more and more cover, as new procedures and cures are discovered. However, this also means higher premiums. On the other hand, healthcare cash plans keep your cover to the basics, such as physiotherapy and chiropractic treatment, sight tests, dietary advice and even cover for some critical illnesses.
We really should have written about these plans in more detail, but it seems to have slipped the net recently. I'll try to write an article on them soon.
Compare medical insurance prices through The Fool.

8. Current account mortgages
The Fool has often suggested you keep things simple by buying all your products separately. By doing this, in almost every case, you will save money. However, the current account mortgage can be a useful exception. These mortgages tie together your current account, savings, personal borrowings and your mortgage. Effectively, you have a current account with one massive, mortgage-sized overdraft.
Sounds frightening, doesn't it? But consider that, with these accounts, every time money goes in it pays off some of your mortgage. Instead of earning interest in your current and savings accounts, you reduce the amount of interest you're paying. This usually works out well.
If, for example, you were previously earning a good 6% interest in your savings account, after tax this would be 4.8% for basic-rate taxpayers and 3.6% for higher-rate taxpayers. However, if you're paying mortgage interest of around 6%, you will reduce your mortgage at this rate and there's no tax to pay, leaving you better off.
'Offset' mortgages are similar. You can read about both
current account mortgages and offset mortgages in our mortgage guide.

9. Income protection insurance
We criticise payment protection insurance again and again, and we're not massive fans of critical illness insurance either, but there is an alternative that is suitable for many people (depending on circumstances). This is income protection insurance. It is designed to pay out whatever the reason that you're unable to continue working.
I compared income protection insurance with payment protection insurance in
Two Ways To Shotgun Your Debts And Income.
> Read more in our insurance guide about
income protection insurance and critical illness insurance.

10. The boring stuff
Those nine products were all quite exciting and novel, but exciting is not usually a word you associate with good financial products. Generally, the more boring and simple the better. So, for number ten, here's a short list of some of the boring products that are effective for most people:
current account paying a competitive rate of interest. Today, the rate should be more than 5.25% on the first couple of thousand pounds. Or, for people living in, or close, to their overdrafts, a current account with an interest-free overdraft, or, at worst, try a account that charges low interest when you're in overdraft.
An instant access
savings account paying a good rate of interest. Again, look for more than 5.25% and probably over 6%.
unsecured personal loan with a fixed rate of interest. These are particularly good for people with no discipline, because, unlike credit cards, you can't easily borrow more with them. A good rate at present is around 6-8%.
As I said in
The Worst Ten Financial Products, in simple terms there are two mortgage products: expensive mortgages, where you pay the lender's standard variable rate (SVR), and the other kind: The Deal. Ensure you have some kind of deal with your mortgage company.
If you find your products don't cut the mayonnaise, you should move to get a better deal. Comparing online is the easiest way.

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