The pits

Mortgages that tie you down

From fixed rates to capped and discounted rates, most attractive deals come with a price: you cannot ditch them in the first year or two without paying a hefty penalty.

It may be reasonable to expect borrowers to be committed to a deal for as long as the favourable initial rate holds, but one that has you in chains for years after the offer finishes is a bad idea.

The rate you have to pay after the honeymoon could well be 2 per cent higher than discounted deals then available. On a £60,000 loan, this adds up to an extra £1,200 a year in interest.

Poor-value annuities

If you save in a personal pension, your provider will, when you retire, offer you an annuity - an income for life, that you buy with your fund.

But independent financial advisers (IFAs) say this is unlikely to be the best value available. You have the right to shop around.

Dan Kemp of IFA Holden Meehan says: 'The difference between the lowest rate and the highest is huge.'

Miserly current accounts

Most traditional high street banks pay a pittance in interest on current account credit balances, even if they average more than £1,500. Lloyds TSB and Barclays pay only 0.1 per cent, even on more than £5,000.

Internet users should consider switching to a web-based bank, such as Smile or Cahoot. These pay 4.85 per cent and 3 per cent respectively on current account balances from only £1. Or you could use your present balance to save interest on your home loan by taking a current account mortgage, such as Virgin One.

Endowment mortgages

These loans - now fading in popularity - use endowment policies to repay the loan, rather than the traditional repayment method.

Endowments are inflexible and often perform poorly as investments. Many homebuyers taking endowment mortgage have recently been told that their investment may not pay off the amount they have borrowed. They have to make up the shortfall another way.

Philippa Gee of independent financial adviser Gee and Company says: 'If you want to be sure your mortgage will be paid off at the end of the term, choose a repayment mortgage.'

Expensive store cards

Department store account cards are tempting when you are paying for a big purchase. By opening one you often get a discount on that day's shopping bill. But if you go on using the card and pay off what you owe gradually, you will be charged very high interest rates.

Annual rates for cards at Monsoon, Russell & Bromley and Country Casuals are 30.7 per cent after 56 interest-free days.

Using a lower-interest credit card is better. Egg, for example, charges 13.2 per cent, and the rate with Smile is 12.9 per cent. Better still, settle your balance monthly.

National Savings

Savers pay for the rock-like safety of Government-backed National Savings products by accepting uncompetitive interest rates.

Money in a National Savings Ordinary account, earns only 1.75 per cent. Legal & General Bank pays 6.28 per cent on £1 or more in its Tracker account.

Obsolete accounts

For every new account paying interest of more than 6 per cent, there are others yielding less than 2 per cent, and occasionally half of that.

In many cases these are obsolete accounts, which banks or building societies no longer offer to new customers. NatWest pays just 2.6 per cent on balances of less than £10,000 in its First Reserve instant access account. Barclays' Instant Savings account pays as little as 1.25 per cent.

Make regular checks on the interest paid on your savings, and change accounts if it falls significantly below the competition.

Unnecessary insurance

Salesmen play on our fears, such as our children being left penniless if we died. People often succumb and buy insurance they do not need.

Anyone who is single and has no one who would lose financially if they died is not likely to need life insurance. Yet a 19-year-old receptionist who was single and had no dependants was sold a policy when her main need was for a savings account.

The Personal Investment Authority Ombudsman's office said: 'The initial sum insured of over £12,000 was excessive...' It was supposed to pay possible funeral expenses set higher than even 'the wildest assumptions about inflation'.

The watchdog ruled that her premiums should be returned with interest, plus £100 for distress and inconvenience.

Bank staff, too, are now keen to sell their customers insurance. Remember, they are salespeople, and most no longer fit the old image of the paternalistic bank manager.

High-start pension fees

Most personal pension firms are anticipating the launch next year of the Government-backed stakeholder schemes by offering similar plans themselves. Broadly, this means flexibility and charges no higher than 1 per cent a year. (See Money Writes, page 18).

But many schemes still levy high charges in the early years. Ask what the transfer value of your pension would be in the first five years, and compare this with what you would have paid in contributions. If it is less, be cautious.

Notice accounts

Savings accounts that tie up your money for a set period don't always pay extra.

Fierce competition among instant access accounts means that some of the best rates are paid on accounts where you can get at your cash quickly.

Financial database Moneyfacts says Bristol & West pays 7.05 per cent on balances of more than £10,000 in its 'save.it' internet account.

This week, the best rate for the same amount in a notice account is also 7.05 per cent, with Scarborough building society. And for that you have to give 90 days' notice to get at your money.

Golden rules for your money

• Avoid high street banks; they rarely offer the best deals for current accounts, credit cards, savings or investments. The best current accounts are from converted building societies and new internet banks

• Consider switching at least some of your borrowing and saving to a building society. These are generally better than the high street banks.

• Keep investments separate from other financial needs. Products such as endowment mortgages - mixing investment with borrowing - are usually bettered by alternatives such as a cheap mortgage plus an Isa.

• Borrow as sparingly as possible on credit cards. Sign up for a card with a low rate and pay it off as quickly as you can. Try not to run up a bill on the card again

• Don't keep large amounts on deposit if you also have debts. You get high risk-free returns from paying off mortgage and credit card debt. Most people will need some money in a savings account, but it does not pay to keep accumulating cash deposits while you have debt. If you don't expect to have to touch your savings for five years, look at investing in the stock market through - in this order - Isas, unit or investment trusts, and shares.

• Check in the financial press occasionally that your current account, credit cards and savings are competitive.

• Get alternative quotes when renewing house and car insurance. Motor premiums are rising sharply, but the AA says it should still be possible to reduce premiums 30 per cent or so by shopping around. It may also be worth checking for a better deal on life insurance: premiums have dropped sharply in recent years; a contract taken out some time ago may now be expensive. Don't cancel a policy before confirming cover with a new insurer.

• Be wary of products demanding long-term commitment. This may be a mortgage with redemption penalties that last beyond the discount or fixed rate, or a personal loan with repayment penalties. Endowment savings plans - similar to those used for mortgages but usually sold on a 10-year term - carry early cash-in penalties. You may not get back as much as you paid in the early years.

• Beware borrowing to pay off debt. This can work if you are careful: a cheap introductory rate on a credit card to clear short-term debt, or a personal loan to cut the cost of assorted debts. But it can be a disaster if you add to the debt you have consolidated. Look first at whether you can budget your way out of debt.

• If you are tempted by a new product aiming to revolutionise the way your organise your finances, ask yourself whether you could achieve the same result by taking a DIY approach.

• Remember that you can't have your cake and eat it. For example, investment products that aim to give a stock market-linked return, but guarantee to pay back your original investment may work out a worse deal than if you simply kept some money on deposit and invested separately in shares.