To switch or not to switch ...
JUST switch has become a familiar refrain when any piece of economic news threatens to impact on personal finances, whether it be a cut in the base rate making existing mortgage deals seem expensive or a drop in gilt yields sending annuity rates – and hence potential retirement incomes – into freefall.
But with new deals for everything from credit cards and mortgages to savings accounts and loans being announced on a weekly basis, does it really benefit consumers to keep switching to get a better deal?
Nick Hill, money expert for the Money Advice Service, said that shopping around for a better deal “can be a vital part of managing your money sensibly”, with consumers potentially being able to gain hundreds of pounds a year by securing a more favourable interest rate or charging structure on everything from mortgages and savings accounts to credit cards and pensions.
However, Chris Hannant, director general of the Association of Professional Financial Advisers, noted that while the ease of switching varies from product to product there are also instances where consumers would be better off staying put.
“There can be a natural time period with a product and switching mid-term usually attracts a penalty so is not a good idea,” he said. “You buy a general insurance product for a 12-month period and there would be no point trying to get something cheaper six months in.
“Likewise, with a mortgage there’s a penalty for coming out mid-term that would exceed any benefit (of getting a cheaper deal).”
On a £250,000 mortgage being repaid over 25 years, for example, the potential annual saving of shifting from an interest rate of 3.5 per cent to one of two per cent is £2,304, with monthly repayments dropping from £1,252 to £1,060.
However, switching a balance of £245,000 during the initial mortgage term, which will typically incur an early-exit fee of between two and three per cent, would mean paying between £4,900 and £7,350 to secure the lower rate – and that is before the cost of arranging the new mortgage has been factored in.
Many pensions also charge exit fees but as they charge annual management fees too it could be worth paying the former to get a reduction in the latter. Indeed, recent research from pensions advisory business Profile Financial found that a 45-year-old with £32,750 in pension savings will typically have paid £12,425 in fees by the time they retire at age 68 if they are invested in older pensions that generally charge an average of 1.47 per cent a year in fees. Switching that pot to a more modern pension, which can charge as little as 0.34 per cent, would cut the total fee bill to £3,275.
Steven Cameron, pensions director at investment business Aegon, said: “There can be real benefits in switching or transferring older pension pots into more modern pensions.
“Older pensions, particularly those set up before the year 2000 often deduct higher charges than today’s pensions. The difference can be quite significant and if you transfer, every year of paying lower charges will boost your ultimate retirement income.
“Bringing older pots together into a modern pension can also offer online access and tools, allowing you to keep better track of your retirement plans.”
While Cameron noted that anyone looking to go down this route should seek professional advice to ensure they fully understand the potential impact of paying exit charges, one area of switching that should be easier to navigate is personal banking.
This is something the Competition and Markets Authority is keen to encourage as it believes that if more customers switch current account more often it will foster competition in the market and ultimately drive costs down across the board.
As part of this drive the financial watchdog is requiring banks to sign up to an app that will allow consumers to access details of all their finances in one place, although Emran Mian, director of non-partisan think tank the Social Market Foundation, said that bank account switching is already a fairly easy process thanks to the Current Account Switch Service. Run by the Bacs payment scheme, the switch service has been running for three years and has been used well over three million times.
Mian said that while many people may be put off switching because the hassle outweighs the benefits “our analysis suggests the savings from switching have increased”.
“Whereas in 2006 the average consumer would have saved £56 a year by switching to the best value account, this figure has more than doubled to £116 in 2016,” he said.
For Hannant, consumers should always consider switching.
“I don’t see any point in overpaying for something, especially if the cost of getting a better deal is small,” he said.
“Depending on the nature of the product and the cost of switching I’d say if you haven’t done it then spend an hour at the weekend doing a bit of internet research,” he advised. “You may be surprised by how much you could save.”