Thorsen has spent the last 14 months working on a Treasury sponsored review into financial advice for the general public. His conclusion? That £49m a year be spent on establishing a nationwide service offering free generic financial advice — on matters ranging from mortgages to simple household budgeting – to all UK citizens. It would be called Money Guidance.

Our financial needs are really quite simple

I rather like this idea. Independent Financial Advisers are big on the idea that all of our lives are terribly different (or “complex” as they like to put it) and that we all need individually tailored advice – but it isn’t really true. Most of us have remarkably simple finances. One current account, one savings account, an ISA if we are lucky, credit card debts if we are not and a pension.

So we don’t need complicated tax planning advice and we don’t need to learn about the derivatives markets or compare. We just need to know where to go to find the highest interest rates for our savings, how ISAs work, why we should pay off our debts before we start saving, and a bit about the pension system so we don’t end up getting too ripped off by the scores of rogue providers out there.

The truth is that my finances — and my financial priorities – are pretty much the same as those of most other thirtysomething women. So a website which I could visit regularly clicking on a button that said perhaps “female, 30s, mother” or some such and get updated information on childcare vouchers, the best ways of keeping pension contributions going during career breaks, a rundown of how to make a proper will and a review of the cash ISA deals on offer would suit me just fine.

A better use of £49m a year?

However much as I like the idea I’m afraid that I still think it might not be the best use of the £49m a year. Why? Because a huge percentage of the UK population is too numerically illiterate to make any use of it at all. A recent report from KPMG showed that more than a quarter of UK adults struggle to add up prices in their heads when they are out shopping and a fifth do not know that 8 is the square root of 64. 39% of fathers say they struggle to help their children with their maths homework.

No wonder most of the population is incapable of comparing credit cards or debt and no wonder most people haven’t a clue how their pension works. Given this might it not be better to hand the money over to maths teachers in an effort to incentivise them to actually teach their students something? Or failing that to the Every Child a Chance charity which aims to help children having difficulties with simple numbers as early as seven. “Adult innumeracy is one of the greatest scourges facing the country,” its chairman John Griffith-Jones told The Times.

I don’t suppose this is a particularly likely outcome given that to work to improve the teaching of mathematics in schools would be to admit that it is currently shockingly bad (which I wouldn’t do…) but I suspect that long run it would serve the country rather better than setting up an internet site to offer information that most of us are perfectly capable of finding elsewhere.

Why avoiding the commission system is getting easier

In the meantime those of us that do want complex financial advice should accept that it isn’t free. I’ve written many times about the evils of the commission system — whereby you pay nothing upfront for financial advice but allow your IFA to help himself to often overly high commissions on everything you buy — so I’m pleased to be able to report that it is getting easier and easier to find advisers willing to take hourly fees instead.

We have our own list of the ones that have contacted us on the MoneyWeek website but many more can now be found via the Forum for Fee Based Advice founded in November last year: it has 70 member firms and is lobbying hard (and quite rightly) for the FSA to create a market structure where by a clear distinction is made between what it calls “sales firms” where “product sales and commission income are the primary drivers of consumer contact” and “advisory firms” — “defined as those free from conflict of interest.”

They hope to have a search engine up and running so you can find a good adviser near you in the not too distant future – but in the meantime you can contact the head of the forum John Lang at Tower Hill Associates.

For more tips and advice, visit the personal finance pages of the MoneyWeek website – or check out Merryn’s new book, Love is Not Enough.

I know that in theory it’s a good idea. Put the annual allowable amount of £3,600 gross into a pension every year for ten years for a child who is two now and it’s hard to see how they can’t have a happy retirement. So why aren’t I doing it for mine? Simple. She won’t be hitting retirement age for many decades to come and I just don’t trust the Goverment not to change the rules between now and then.

Why shouldn’t a hard-up chancellor struggling with the legacy of Gordon Brown’s overblown public spending policy suddenly decide that the under-21s can’t have pensions and claw back any gains? Who’s to say that the annuity system under which any tax gains we may have made on pensions, are then ripped from us by the financial services companies, won’t become more, not less, restrictive?

And given the paucity of fund choice when it comes to stakeholders, how can I know that in the end getting her one will be any better for her than simply drip-feeding money on her behalf into a soft commodities-based Exchange-Traded Fund (ETF)? I also wonder whether this passion for investing for our children via various Government-sponsored schemes (and in this I include child trust funds) really makes sense. My own pension is far from full enough (recent estimates from my Self Invested Personal Pension provider tell me I’m currently on track to get a pension of just under £3,000 a year), so surely I’m better filling that up than anything else?

Secure your own future first

The way I see it, the best way to secure your children’s future is first to secure your own. Most people of new parenting age are in debt (the average non-mortgage debt of the under-30s is around £7,000) and have as pathetic a pension as I do. To start squirreling money away in stakeholder pensions and child trust funds before you sort this is surely getting your priorities wrong. Will your children thank you for signing them up for a pension before they’re out of nappies if the end result is that they have to spend their 30s figuring out a way to pay for your nursing home fees, because you never got round to sorting out your own savings?

I doubt it. There’ll be no toddler stakeholders in my house. Savings are going to be all about the adults — at least until we own houses outright and have full pensions and Isas. That way, not only will our children never have to support us, but if they’re lucky (and one of Gordon’s successors is in a good mood), they may even inherit a bit too.

So while we’re on the topic of managing your own savings, there’s a few things you should be doing before the end of the tax year. I know it’s a few weeks away, but it’s worth being organised to make sure you take full advantage of the various tax allowances that work on a ‘use it or lose it’ basis.

Two things to do before April 5th

The most obvious one is your Isa allowance. If you haven’t put away £3,000 in a cash Isa yet, then it’s well worth doing that — the interest is paid tax free and in the current uncertain climate it’s more important than ever that you have an ‘emergency fund’ consisting of three to six months income put away somewhere safe and accessible.

You can also invest up to £7,000 in a stocks and shares Isa (less any money put into your cash Isa). Clearly, the stock market isn’t the cheeriest place to be invested at the moment, but you are allowed to hold cash in an equity Isa as long as you intend to use it for investing. Bear in mind that HM’s Revenue & Customers will still charge you 20% interest on any cash held in an equity Isa this way.

For basic rate taxpayers, it’s worth remembering that if you plan to make any pension contributions, best to do it before April 5th if possible. At that point, the basic rate of income tax will drop from 22% to 20% – it’s good news for your pay packet, but it also means that basic-rate tax relief on pensions will fall by the same amount. So if you do have a lump sum to put into your pension, do it now.

For more tips and advice, visit the personal finance pages of the MoneyWeek website – or check out Merryn’s new book, Love is Not Enough.

But all to no avail. Instead of being offloaded into the hands of a price-insensitive hedge fund manager or one of the wealthy foreign buyers we are led to believe constantly roam our streets buying every overpriced property they pass, Hoppen’s penthouse is still very much on the market. Last week it was in the Mail on Sunday, being described by an optimistic estate agent as “a trophy flat not an investment” and by Hoppen herself as “a wonderful space to live in and entertain.”

Why City buyers won’t – or can’t – buy

This sounds great doesn’t it? The flat is gorgeous – I haven’t visited and don’t suppose I’ll be getting an invite any time soon but I do read an awful lot of newspapers so I have seen a good few pictures of it. But I still don’t think we have read the last about this particular “palatial living space” with its “rich tapestry of velvet fur crystal and chain mail.” Why? Because I can’t quite see who will buy it.

The wealthy foreigners, assuming they exist, are unlikely to want to buy in Battersea when they can buy in Chelsea (as they now can — there is much more on the market than there was) and the City buyers have all but vanished. They now all have to worry about losing their jobs: note that even Goldman Sachs, which claims to have been barely affected by the unquantifiable sub-prime losses that have floored everyone else intends to dump 5% of its staff, something which rather suggests everyone else will have to dump more like 10, 15 or even 20%.

Most of them will be also suffering a little from the volatility of the last few weeks; even if it hasn’t hit their wallets much it won’t be doing anything for their nerves nor will it put them in a spending mood. But worse than all this — from the point of view of someone trying to sell a two bedroom flat for more than £500,000 in London — is the fact that even if well-paid buyers were mad enough to want to take out a huge mortgage to buy a London property they probably couldn’t do so.

The banks aren’t just pulling back from the traditional subprime market, they’re also tightening up on the way the make their really big loans. In the early part of last year it wasn’t hard to borrow £1m plus. This year it is very hard indeed. So City workers hoping to borrow a large sum of money secured on a salary that might not last much longer or a bonus that may never appear are finding their buying power much more restricted than it has been for a while. Hoppen often says in interviews how much she loves her flat in Battersea. Given that she might be living there a while (assuming she doesn’t cut the price to meet her market) that’s no bad thing.

A better place to buy a flat

Anyway, if you’re in a hurry for a flat there may be a better place to go than to Aldine Honey (Hoppen’s estate agent): the auction house. According to Allsop, the UK’s biggest property auction house, the number of repossessed homes going under the hammer has doubled since last year: they now make up around 40% of the houses sold (for an average price fo a mere £200,000) at auction. Allsops has just published its February catalogue — there’ll be 410 lots for sale over 2 days. Will there be more in March? You can bet on it.

A few years ago anyone who could breathe (and plenty who couldn’t — note the rise in mortgage fraud) could get a mortgage for 100% of the purchase price of the property. No more. Today that’s 90%. Or, if you are considered a subprime borrower, more like 75%. So if you borrowed 100% on a deal that has just come to an end and you want to remortgage, you can’t. And if that means that you can’t make your repayments — when deals come to an end interest rates and payments go up nastily — your house could all too easily end up at Allsops with all the rest of them.

On the plus side you’ll have the interesting experience of finding out what it is really worth. An auction is the purest possible way of finding out the right price for something. There’s no PR, no careful marketing, no estate agent lies or manipulations, no ‘staging’ and no waiting for the ‘right buyer.’ There’s just a man with a hammer and a room full of potential bidders. And the price one of them eventually pays? That’s the market price — the right price for that house given the prevailing market conditions. I wonder if the Battersea penthouse would get £5m if it went to auction.

While I’m on houses, a word on London prices. There is a very resilient myth in the market that has it that prices in London did not fall much in the last crash. This is not true. As Cliff D’Arcy of the Motley Fool pointed out in a recent article, in fact they did fall. By a lot and by more than the national average. In the fourth quarter of 1988 the average London house was going for £105,234. By the first quarter of 1993 you could have picked one up for £75,983. That’s a fall of 27.9% compared to a national average fall of only 12.5%. I wouldn’t call that not falling much.

A lot of you are asking what on earth you are to do with the vast gains you have made from selling your houses at the top of the market. If you are going to be using them to buy another house in due course I’m afraid there is only one answer. You must put them in a savings account and leave them there.

For more tips and advice, visit the personal finance pages of the MoneyWeek website – or check out Merryn’s new book, Love is Not Enough.

According to figures from wealth management company Chase de Vere, 14 lenders have not reduced their Standard Variable Rates (SVRs — the rate off which they price their other mortgages) by the full 0.25% cut in base interest rates. Indeed, it’s been five weeks since the Bank of England cut rates yet lenders from Intelligent Finance to Skipton Building Society not only haven’t cut their SVRs by the full amount – they haven’t cut them at all!

At the same time 18 banks and building societies have had a go from the other side: they’ve cut the interest rates they pay on one or more of their savings accounts by more than the base rate cut. Moneyfacts.co.uk points out that Alliance & Leicester have cut their rates not by 0.25% but by up to 0.5% while lots of other banks, including Natwest and the Royal Bank of Scotland have cut rates by up to 0.35%. Irritating isn’t it?

How the big banks overcharge you by £400 a year

Equally frustrating is the way our big banks are persisting in racheting up their everyday charges. They’ve been pilloried for it all over the press with folk band Oystar, egged on by Martin Lewis of moneysavingexpert.com, going so far as to release a critical single called I fought the Lloyds and won about the battle to reclaim charges (it is already in the top 20) and splashing news of its progress all over the place. Yet even now — even as a case brought by the Office of Fair Trading to establish the legality of bank charges is on the verge of hitting the High Court — they are still at it.

According to figures from Moneyfacts, go overdrawn at one of the high street banks without arranging it first and it could end up costing you £160 in a matter of days — and that’s not including the fact that you’ll be charged interest at something like 17-18% on the lot. Worse, that’s just the start of the many ways your bank can, and will, fleece you — a survey last year showed that bank small print includes a staggering 110 fees and charges for what most of us think are basic financial transactions. However of all the things that infuriate me, the biggest is the fact that so few banks pay proper rates of interest on current accounts — the average is around 1%.

This matters. If it isn’t earning interest your money loses its purchasing power fast: if inflation is at 4% (i.e. average prices are rising at 4%) you need to make 4% on your money (after tax) just to be able to buy the same amount of stuff with it at the end of the year as at the beginning. If you aren’t you are effectively losing money every day.

Worse however is the fact that the banks use the fact that you have a current account with them to sell you their other rubbish: once they have you handing your monthly salary over to them and you look like you might be the kind of person who tends to pay back their borrowing, you’re at the mercy of their hordes of salesmen (they call them advisers) and their offers of endless loans, credit cards, unnecessarily complicated investment ‘products’ and mortgages. Add up all the sins of the average big bank, says Which? and the result is nasty: they effectively overcharge customers by £400 a year each thanks to their range of rotten saving and loan products and their high fee structures.

How not to get ripped off

The kneejerk reaction to all this is to call for more regulation. But there is an easier way to deal with our bad banks — vigilance. You don’t have to keep your savings with Alliance and Leicester nor your mortgage with the Scottish Building Society (which passed on a measly 0.15% to mortgage holders rather than the full 0.25%). And there is rarely any need to run up an unauthorised overdraft: at the price they tend to end up coming in at you are better off using a credit card if you are out of money. And of course it really isn’t that hard to change your current account to one that will treat you reasonably well: once you have made a request to switch, your old bank has three days to provide your new bank with all your details who should then set everything up.

The banking market should be very competitive, particularly right now when they are all having to fight for customers in a tough market — fewer people are looking to borrow less money than they were last year. There are plenty of players trying to make money out of selling us the same products and the only reason they so often get away with fleecing us on our borrowings and our savings at the same time is because we can’t be bothered to do the minimal amount of work required to stop them doing so. Note that despite the fact that they offer some of the worst accounts on the market 70% of us still bank with the UK’s four big high street banks — Lloyds, Natwest, HSBC and Barclays. It’s pathetic.

So why do we keep letting it happen? Why don’t we all just resolve not to be ripped off any more but instead to bank with organisations that treat us fairly and — and this is the key — transparently. Putting this into action should be easy. First find the current account that suits you best (First Direct is good), move your money into it and promise yourself you will never exceed your overdraft limit.

Next check your savings accounts. Earning less than 6%? Then move your money somewhere better. Click here for the current best buys (but be aware that you will only get £35,000 back if your bank goes bust so you might want to click here to check the risk levels of the high payers, which you can find at the end of this article.

Then turn to your mortgage. Paying more than 6%? Then have a look to see if there are better options out there and if there are — and there should be — move. Click here for best buys.

If we all do this, all double check our situation regularly, and all shift our finances around when we need to, it shouldn’t be too long before the banks start behaving a little better, court case or no court case. They’ll have to or they will find themselves entirely without customers — we’ll all have moved on.

For more tips and advice, visit the personal finance pages of the MoneyWeek website – or check out Merryn’s new book, Love is Not Enough.

We’ve heard that 41% of people paid for some part of Christmas on their credit cards; that more people than ever before will go bankrupt this year; that repossessions are likely to keep rising all year; that mortgage rates going to keep going up even as base rates fall; and that the average person only has enough cash to last 12 short days should they leave their jobs.

Hot on the heels of this has come a plethora of articles telling us what to do about it. Anyone who doesn’t know how to consolidate their loans, find an interest free credit card, cut their utility payments, create a budget spreadsheet (you can download one here), and get a cheaper mortgage by now clearly hasn’t been listening to the personal finance experts properly.

But reading — and writing – all these money makeover articles this month, I’ve been beginning to wonder if for many people the best way to survive the credit crunch and free up a lot of cash in a hurry might be to stop bothering with financial micro managing, dump their mortgages altogether and rent somewhere to live instead.

Why it makes sense to rent, not buy

Selling to rent (STR as it is now known) has made some financial sense for some years now in cash flow terms — i.e. rents have been generally cheaper than mortgage payments on most properties. But now that the chances of making a capital gain on owning a house (the only reason to have bought over the last 3 years) look pretty low, it seems to make more sense than ever.

Have a look at www.primelocation.com. Here you can see the rental and sale prices of hundreds of thousands of houses. It makes for very interesting reading. One example sent in by a reader from Wales makes the point very clearly. He points to a nice looking ‘executive’ four-bedroom house with views over fields to the rear and close proximity to several excellent schools. It is both for sale and for rent. The sale price is £315,000 (at least 12 times the local average wage).

A repayment mortgage on this amount would come to around £2,000 a month and even an interest-only mortgage to around £1,500. Yet you can rent this very same house for £750 a month (offering its current owner a pathetic gross yield of under 3%), a saving of £750 a month — and that’s before you even factor in the fact that you don’t have to be responsible for its upkeep.

The situation is much the same in other parts of the country. There has, for example, been much talk about how fast rents are rising in central London, but they’re going to have to rise an awful lot faster for it to make sense to buy instead of renting.
A 3 bedroom mews house in Bayswater currently costs around £1m. The cost of owning it, on even an interest only mortgage, would therefore come in at something like £55,000 a year – and that’s only if you don’t include the purchasing costs, (another £45,000 or so) or the maintenance (at least another £5,000 a year). The cost of renting a similar house? About £39,000 a year. That’s £16,000 less.

Homeownership isn’t everything

I am not suggesting that people with no serious financial problems, with mortgages they can afford and with houses they and their families like living in suddenly sell up and rent instead. Moving house is an awful lot of bother if you don’t have to do it.

But if you are heavily in debt and scared of losing your home (as the newspapers seem to think everyone is), why not just sell up, move into a cheaper rented house and then pay off your debts with the money you save on not having a mortgage every month?

My guess is that over the next five years being debt free is going to feel a lot better than being up to your eyeballs in interest payments, even if the latter means you get to keep claiming ownership of your own (depreciating) home.

For more tips and advice, visit the personal finance pages of the MoneyWeek website – or check out Merryn’s new book, Love is Not Enough.

But some of us will hit the New Year pretty certain that we don’t ever want to have to spend another Christmas with exactly the same lot of family ever again: more divorces are filed in early January than at any other time of the year.

This makes sense. These days we all work hard (often far too hard) so we don’t see enough of each other to keep our relationships working as they should: instead of talking problems out we can get away with ignoring them.

Until Christmas. Then they surface with a vengence. And worse, Christmas is expensive. Couples row more about money than about anything else so when the pricey presents start piling up it shouldn’t be much of a surprise that so too do the rows about the bills.

The problem, of course, is that divorce takes financial problems and makes them worse. In marriage every burden is shared. In divorce every burden is doubled. And not just emotionally, but financially too. One house becomes two houses; one phone bill, two phone bills; one set of insurances two sets of insurances. Suddenly there are two lifestyles to deal with. A total income that is sufficient to run one household rarely allows two households to survive in a similar style: when a marriage breaks down everyone usually has to suffer.

How to find a good solicitor

So once you’ve decided that suffering is vital to your long term happiness, what next? First up is finding a solicitor. just as you shouldn’t rush into marriage you shouldn’t rush into divorce: one of the main reasons to go to a solicitor and get proper professional advice is to slow things down a bit.

Most good solicitors will start off not by looking at a list of your assets to figure out who might get what but by asking if you can be reconciled. A great many couples are apparently shocked into sense just by visiting a solicitor’s office. It is possible to file for divorce online — you input your details and you’re off — but to my mind you really shouldn’t be able to file for divorce on the spur of the moment: computers don’t stop to ask if you are sure, good solicitors do.

So how do you find a good solicitor? You don’t just need someone who is good at their job, you need someone you feel you can trust: if your divorce drags out you could be seeing them regularly for a couple of years. The best way, as ever, is personal recommendations.

If friends suggest someone good, meet them — but don’t think you have to use them if you don’t think they’re quite right. Solicitors don’t take offence. Otherwise you can ask at your local Citizens’ Advice Bureau or contact Resolution, an association of matrimonial lawyers who work with a code of practice designed to help you come to a settlement in a positive and conciliatory, rather then overly litigious, way.

And if you think you can be even the smallest bit amicable about your divorce you might want to consider something new — collaborative law. This is a system under which lawyers and their clients agree not to go to court to work out a settlement but to work it out themselves. In court differences and arguments can become exaggerated, making the whole process even worse than it has to be. This system avoids the acrimony as much as possible by having the two sides meet at a round table with their lawyers and talk it out until they have a sensible settlement. Think Mick Jagger and Jerry Hall rather than War of the Roses. See www.collabfamilylaw.org.uk for more on this common-sense route.

Remember: every angry letter and phonecall costs

If you end up taking a non amicable route never stop thinking about the cost. When you are caught up in a legal battle, instructing your solicitor to fire off letter after letter to your spouse, it’s easy to forget that the cost of every letter will come out of the final pot of cash that you both have to live off. As Imogen Clout points out in her book, Divorce, people in nasty divorces often talk about ‘fighting for their rights, or justice or the principle of the thing’, forgetting that the law is pretty clear on how assets should be divided and ‘that divorce law is not designed to deliver abstract redress or compensation’.

Solicitors charge for their time — every minute of their time. You will pay for every letter, every phone call and every meeting. You will even be charged for their travel time when they come to court. And their rate can be anything from £120 an hour plus VAT to a great deal more. That’s a cost to you of about £2.30 a minute.

Big-money divorce can cost from £20,000 in fees. So only consult them when you really need to. Don’t call them when you are angry (a therapist will be cheaper) but only when you need legal advice. And remember your lawyer probably doesn’t much care about how you perceive the rights and wrongs of your case; they just want to sort it out and get paid.

Fairness is an ‘elusive concept’

On the plus side this, in most cases this isn’t that hard. Divorce settlements used to be made on the basis of making sure the ‘reasonable requirements’ of the poorer partner (usually the wife) were taken into account, but now when there are more assets than needed for just this (when there is a ‘surplus’) the ideas of ‘fairness’ and equality have taken over.

Even if there has been one main breadwinner in a family each party is still entitled to maintain their living standards post-divorce as much as possible: domestic contributions are considered as valuable to a family as the role of a breadwinner. Property is now usually divided fifty-fifty, for example.

There is also now scope for women who have given up careers to be stay-at-home mothers to be compensated for this in the settlement. There were howls of protest from men all over the country in 2006 when Julia Macfarlane was awarded £250,000 a year out of her husband’s earnings of £750,000. But was that really too much? Macfarlane had given up her career to look after her husband and her children (she was out-earning him when she stopped work) but after a decade-long break can hardly be expected to pick up where she left off. By becoming a wife and mother she gave up a huge earning potential. So why should she, because she stopped work to look after children, have a lower standard of living than her ex-husband?

It’s a vexed question. Some say she was entitled to everything she got: if you are dumped after such a long time you are ‘due a lot of back pay’ as one ex-wife put it in Style magazine. But some say that giving up work was her choice (clearly the Macfarlane family could afford childcare) and that having less money now is simply the price she has to pay for making that choice. Fairness, as law lord Lord Nicholls of Birkenhead said in his judgement on the case, is ‘an elusive concept’.

The basics of divorce settlements

ultimately, what we think about the Macfarlane case or indeed any of the high-profile divorce cases that hit the papers is irrelevant in most cases: the assets of most married households, when divided, simply aren’t enough to keep two households well, let alone to allow arguments about the surplus. Settlements are less about who gets the house in Harbour Island and more about how assets can be divided so both parties can actually survive.

The average divorcing couple in 2006 had only £165,000 in assets to divide between them — hardly enough for both to be even satisfactorily housed post-divorce. So the courts have a fairly standard way of sorting out financial settlements. They will take into account the needs of each part of the family, the length of the marriage, your ages and the contributions each of you have made (making no differentiation between financial contributions and household contributions) and divide all your assets accordingly, sorting out everyone’s basic needs first and then divvying up the surplus if there is one.

This is all very traumatic, but it isn’t that complicated: there tend to be set answers depending on how long you have been married, whether you have children and what each party brought to the marriage and contributed during it. For basic information on all this visit www.divorce.co.uk which offers a good (and free!) round up of the legal process and potential pitfalls – as well as some help with the emotional issues that come with divorce.

For more tips and advice, visit the personal finance pages of the MoneyWeek website – or check out Merryn’s new book, Love is Not Enough.

But very rarely does one see something in the papers that even begins to measure up to behaviour that passes for perfectly normal in the financial industry. Look at the way shareholders in banks are ripped off by their senior management. Chuck Prince’s reward for making a mess of Citigroup (he resigned after the bank revealed $11bn in subprime related losses) was a pay off of $30m plus a car, driver, admin assistant and an office in Manhattan for five years.

To the rational man in the street this makes no sense at all. Not only is $30m a vast amount to pay for failure but the provision of an office, more staff than most of us ever have and a car is bemusing. Why should the bank’s shareholder continue to support the ego (for this is what this boils down to) of a man they have already dumped for another five years?

The fees that eat into your returns

Next look at a slightly different aspect of the industry: the way we are regularly ripped off by fund managers. This is an issue at all times but particularly so in times of low returns (such as the ones it now looks like we are entering). When you are making 20% a year perhaps the odd 1% here or there doesn’t seem a big deal. But when you are making more like 5-7% it really is.

£10,000 invested in a fund that returns 7% a year will be worth £14,000 in five years if you pay no fees at all. Pay 1% a year and it will be worth £13,338. Pay 2% and your money will have grown to only £12,667. Over ten years the gap widens. With no charges the money is worth £19, 670. At 1% it is £17,790 and at 2% it will be worth a mere £16,070 — over £3000 less.

Two percent is not an extreme number: the UK’s fund managers are very greedy indeed and annual management charges (AMCs) on most UK funds run on average at a far too high 1.5-1.7% (some are lower and a lot are higher).

There’s also a host of other charges involved in investing in most funds. In most cases legal fees, marketing costs, performance fees (which are becoming more and more common), admin fees and trading costs aren’t included in the AMC, making the full cost of owning most funds significantly higher.

Funds are also prone to putting their fees up without much warning — there is no unit holder body of any kind they have to negotiate with before doing so — and, worst of all, many of them charge exit fees too. So if you decide you don’t want to be invested in them any more, either because they are too expensive or they are underperforming the market (as the majority of them do) you can’t even sell them without paying another fee. Outrageous isn’t it? Particularly given that very few of these expensive managed funds ever manage to out perform the market as a whole anyway.

Cynical exploitation of ordinary people

However for the worst examples of the cynical exploitation of the general population by the financial services industry we have to look to the mortgage market. With Hometrack reporting that average house prices fell for the first time in two years in October and the Council of Mortgage Lenders forecasting that repossessions could rise by 50% in 2008 most rational people wouldn’t, I don’t think, feel that now is a particularly good time to be in negative equity.

Not so the mortgage sales teams at Abbey. No, they are still happily flogging their “100% plus” mortgage. This lets you borrow the full purchase price of the house or flat you want and for good measure another £25,000 on top of that. What’s more, having dumped you into negative equity with the stroke of a pen, Abby also have a few suggestions about how you might spend the extra cash on offer —“renovating your home, buying a new car or consolidating all of your debts” perhaps.

This is shocking stuff. The first and last ideas aren’t great (if you can’t afford to renovate you shouldn’t do it, and debt consolidation usually leads to higher interest bills in the end) but the second – buying a car with mortgage debt – is completely insane. Why on earth would you borrow against one asset that is by most accounts already falling in value (your house) to buy one that will do the same just fast (a new car)?

Let’s say you borrow £125,000 on a £100,000 property. You then rush off to spend the left over £25,000 on a purple Audi A4. Depreciation on the car after a year will be at least £6,000 (and probably more). So take one of these loans out now and assuming house prices don’t fall further, next November your assets will be worth only £119,000. That’s not good, given that your debt will still be near £125,000. And if house prices keep falling, it will be even worse. Note that once you owe more on your house than you can sell if for you are trapped: you can’t sell it or your debt will fall due but staying — and continuing to pay interest you can’t really afford on the price of a depreciating asset is usually pretty miserable too. Anyone who falls for Abbey’s marketing nonsense this year will soon find that they have effectively sold their freedom for the price of a new car.

So there you go: whether you are a shareholder in a bank, an ordinary investor or just a mug of a first time buyer looking to get yourself a home, the financial industry has a special way of separating you from your cash. What can you do to stop them?

How not to line their pockets

You can amuse yourself watching the market giving the remaining big bank bosses their comeuppance (there is lots of hard work and not much in the way of bonuses in the stars for the next 3-4 years). You can stop buying over priced funds and invest via ETFs. These have several virtues that should serve those who use them well over the next few years. The are cheap and easy to get in and out of; they charge low fees; and they offer direct exposure to all the most interesting bits of the market — oil, gold, silver and soft commodities. You can find out more about ETFs at Moneyweek

And finally, you can stop listening to the hype from the mortgage lenders and if you can’t afford a proper mortgage on the kind of house you want to live in you can rent one instead (there’s little danger of losing out on the capital gains front these days). Add that to cutting up your credit cards, never going over your overdraft limit, and not buying insurances you don’t need (as discussed here before) and you’ll have gone some way towards protecting yourself.

For more tips and advice, visit the personal finance pages of the MoneyWeek website – or check out Merryn’s new book, Love is Not Enough.

That’s 10% higher than at the end of last September. The average household debt excluding mortgages across the UK is £8,681 and the average individual consumer debt via credit cards, motor and retail finance deals, overdrafts and loans is just over £4,500.

And the Christmas shopping season hasn’t even started yet: every year a third of people say they go into debt to make it the ‘best Christmas ever’ and one in ten of those are still in debt by the next Christmas. This is hardly surprising given that most of these borrowers buy with their credit cards.

The perils of plastic

Credit cards are terrible things. The main problem is the interest rates they charge. They are far too high, of course, but they are also almost impossible to figure out. And not just for the financially illiterate, for everyone. The obvious way to compare credit cards is to look at the annual rate of interest they charge (APR).

But the problem with this is that different companies calculate it in different ways (there are at least 14 methods according to Which? Magazine) so knowing the APR isn’t much good. Some cards start charging you interest the second you buy something, and some when the money leaves their accounts; some don’t charge you for 30 days and some for longer; some charge interest on interest accrued in earlier months; some do not; and so on.

The result? Two cards that appear to charge the same rate of interest could in fact cost you wildly different amounts even if used in the same way. It all adds up to a slightly ridiculous lack of transparency.

Next up on the list of bad things about credit cards is the fact that credit card companies have set minimum repayment levels so low that if you pay only what they require you to pay you will be in debt pretty much for ever.

You could be in debt for 32 years

Uswitch recently published research showing that if someone with the average credit card debt of £3,138 paying the average APR available in the market (15.2% at the time) made only the minimum payment each month (i.e. 2% of the balance) it would take them a shocking 32 years to pay it off. If you paid not 2% but 3% it would take 16 years and 11 months, assuming an interest rate of 15.10%. In the first example the total amount of interest you would pay would be £4,275 (significantly more than the original debt) and in the second it would be £1,969.50.

See how much money the banks make out of letting you get away with paying your debt off so slowly? Low minimum payments make debt seem more affordable to you but to the credit card company executives they just spell pure profit.

The final thing on the list of charges against cards is the many non-interest charges that credit card companies have invented. They charge you a minimum of £12 if you pay your minimum payment late regardless of the size of your balance. So if you owe them £70 for a coat you picked up in the sales you could end up paying out almost 30% of the price again in late payment fees if you aren’t careful.

You’ll also very often pay a 2% charge if you use your card to withdraw cash (you really shouldn’t be doing this) and another 2.5% ‘loading charge’ if you use your card abroad. It all adds up: according to moneysupermarket.com credit card customers pay a huge £116 each a year in penalty fees. Credit card companies go to great lengths to persuade you that being a card holder is somehow a privilege but once you add up all the charges it doesn’t seem so much like one, does it?

But credit cards aren’t all bad

Still, I’m not suggesting that you cut up all your cards. You should certainly cut up any store cards (according to research from Alliance and Leicester 23% of people say that they use store cards to pay for their Christmas shopping). They charge horribly high rates of interest, often well over 20% a year and at their worst over 25%, and there is absolutely no reason to have them.

You usually get offered 10% or so off a purchase if you take out a store card as you buy, but why do you think the retailers are happy to do this? Because they know that like as not you’ll either forget or not be able to pay off the debt you’ve taken out. Then they’ll be able to start charging you obscene amounts of interest. And that, they know will, will soon make up for the couple of quid they gave you in discount.

Ordinary credit cards that you can use anywhere, on the other hand, do have a few plus points. It’s good to have one for emergencies and there is also a case for having one with a very low credit limit to use when you shop on the Internet (a low credit limit reduces the level of mischief anyone can get up to with your card if they manage to steal the details and hence the level of stress you will have to deal with when sorting it out).

Finally it is worth noting that credit cards offer one very wonderful thing, valuable consumer protection. Buy something worth more than £100 and less than £30,000 and the card company is as liable as the retailer if anything goes wrong. If your item is faulty or isn’t delivered as it should be for example you can go straight to your credit card provider instead of or as well as the supplier to complain.

Until this week there was some doubt about whether this protection held if you had bought the item abroad but last week the House of Lords confirmed that it does. So if you are taking advantage of the weak dollar (now at a 26 year low relative to the pound) to do your Christmas shopping in New York there is a good case for doing so with a credit card – as long as you pay it off at the end of the month.

If you want to get a credit card for occasional use and you’re sure you’ll use it responsibly – or you’re looking to save money by switching to a 0% offer – you can compare different providers by the level of interest paid on balance transfers or purchases here.

For more tips and advice, visit the personal finance pages of the MoneyWeek website – or check out Merryn’s new book, Love is Not Enough

Before his pre budget speech on October 9th everyone was able to leave £300,000 to his or her heirs tax-free. Anything over and above that was taxed at 40%. It also used to be the case that, while their allowances died with each of them, couples could leave a total of £600,000 (£300,000 + £300,000) tax-free to their children.

For the rich this was easy. The first person to die simply left £300,000 to some one other than their spouse taking £300,000 out of the estate. Then when the second died she also left £300,000 tax-free and the rest at 40%.

For the not so rich it was a bit harder: if most of a couple’s assets are tied up in, say, a house that the survivor will want to live in it isn’t that easy to hand over £300,000 worth of it on the first death. Too often this meant that the first to die left everything to the other (remember that transfers between spouses are entirely tax free) wasting his own allowance to make sure she had enough to live on until her own death. On her death her heirs then benefited only from her allowance of £300,000.

The solution to this for the IHT aware has long been to use a variety of nil rate band trusts whereby the first £300,000 of an estate is put in trust for the heirs on the first death. This means that the cash or asset in question is still available to the survivor but, with the heirs as final beneficiaries of the trust, it is also outside the estate. These are relatively simply structured trusts and cost around £5000 to set up and £2000 a year to run.

So what’s changed? If you are not married, nothing. If you are married, the admin. From now on married couples and civil partners are to be able to combine their allowances without bothering with the reams of accountants, IFAs and lawyers who they once relied upon to set up their trusts. How? By transferring any unused part of their allowance to their partner.

This is brilliant news for those who have done no IHT planning whatsoever and have estates worth less than £600,000 (now they don’t have to feel guilty about it — their indolence has been well rewarded) and particularly good news for the children of widows and widowers whose dead partners never used up their own nil rate bands — the new rules work retrospectively so when their second parent goes they’ll still get up to £600,000 tax free. No trusts needed.

But what of those with estates worth more than £600,000? They may have higher allowances but they’re still going to get stuck with a bill of some sort. How can they keep the tax bills of their heirs down?

There are still lots of clever wheezes about for this — the same nil rate trusts will keep on working for large estates and there are still several investments that can be passed on IHT free (farmland, forest land, Aim stocks and so on). You can also make as many gifts out of income as you like as long as they don’t affect your own lifestyle — if you have a high income and a modest lifestyle you should be able to get rid of quite a lot of cash in this way.

However just because something is fiendishly clever doesn’t mean it will work. I keep getting asked if offset mortgages can be used to cut IHT bills and at first glance this seems like a piece of pure IHT brilliance. Here is one of the reader letters that explains the concept:

Dear Merryn,

I wonder if the following is a potential way of avoiding Inheritance Tax:

We (parents) take out a new interest-only Offset mortgage, sufficient to bring the remaining equity in our home well below IHT threshold to allow for future house price inflation.

We give the kids the money. They put it into their own savings accounts which are linked to the offset mortgage. The kid’s offset savings accounts reduce our mortgage payments to (nil?).

Providing we survive 7 years, and the kids haven’t run off with the money, are we then legally avoiding IHT?

It sounds great doesn’t it? I was so taken with the idea that I called IFA Craig Davidson and asked him to find the flaws, which I’m sorry to say he did. Here’s his main point:

IHT works on the basis of “loss to the estate”. If one is to make a gift and start the 7-year clock ticking, the gift has to truly leave the estate. If there is the option for the gift to return into the estate, or indeed benefit still to be enjoyed by the estate of the gift, then the revenue deem the gift to have never been made. In this case, the funds raised would be gifted to the kids, put in a bank account which then reduces the parent’s mortgage payments. The parents are therefore still benefiting from the funds and so the 7- year clock has not started.

One final thing – The revenue often fall back on the anti-avoidance doctrine. This basically says if you go from A to B and get taxed, and so to avoid this you go from A to C to D to B, which would normally not be taxed, they will ignore the extra steps and deem you to have gone directly from A to B — and tax you accordingly. There must be a reason for taking the extra steps, other than simply to avoid tax.

It’s a shame, but I’m afraid that seems to knock what looked like a fantastic idea on the head. Any other ideas gratefully received.

For more tips and advice, visit the personal finance pages of the MoneyWeek website

She’s right of course. Over the last few years any sense that a house is more a home than anything else has vanished. Instead houses — or “properties” as we now call them — are investments. People buy houses in areas they don’t want to live in because they are ‘up and coming’ and therefore might turn out to be a better investment. They buy houses and then do them up like show homes (there was actually an article in one of last week’s papers headlined How to make your house look like a show home) with the idea that this will make them worth more.

Whether it makes them nice to live in is by the by. They sell on house after house without ever making a home. Then they bore the rest of us by talking about it endlessly on the TV, in the newspapers and in every pub the length of the country.

So deeply ingrained is the new idea that a house is a moneymaker not a home that property presenters regularly tell people that they don’t have to like their first homes. It is, they are told, not about where or how they want to live, but about making money (this is why everyone is always so shocked when you tell them you rent your house because its cheaper to rent these days and you get to live somewhere nicer by doing so).

I had this in my mind this week when I was reading yet another pitch in a Sunday paper about buying in Bulgaria. I can’t understand why you’d buy a house in the UK that you didn’t much want to live in but I understand even less why you would buy one abroad that you didn’t even much want to holiday in. But that is exactly what the property media appears to still be urging us to do.

If you can’t afford to buy at home they say, buy in Bulgaria, Dubai, Montenegro or Mongolia instead. Whatever you get will go up in price and next thing you know you’ll be able to sell it for a mini fortune and use the cash to buy in Britain. For those who already own a ‘property’ in the UK the idea is sold in a different way — owning a house abroad is a natural extension to the domestic buy to let business, and now the UK market is looking a bit iffy, it’s a better business too. You get a holiday home (hooray!) but even better you get to be on another country’s property ladder as well as your own and that, or so the story goes, means free money.

Or does it? House prices in the UK are so high (for now) that the rest of world looks practically free to us: you can get 10 flats in Bansko for the price of a one bed flat in Balham. But much of ‘abroad’ is cheap for a reason. I’ve written about my dismal holiday in Montenegro before so suffice it to say here that thanks to corrupt police, nasty food, aggressive locals and filthy hotels it wasn’t one of my best breaks ever. It may be true that you can buy a beachfront villa in Montenegro for the cost of a garage in Clapham and I know some people adore Montenegro but, given the choice, I’d rather holiday in Clapham. So it makes complete sense to me that Montenegrin houses are cheaper than houses in the UK — and that they should stay that way.

Same with Bulgaria. This weekend’s article told us all the same things we’ve been told a million times before. That the deals on offer now are extraordinary, that we should rush in to take advantage of win-win opportunities on the Black Sea coast or in the nation’s developing ski resorts. Buy them, rent them out, make a fortune. The problem is that it already hasn’t quite worked out like that. Instead rental returns are hopeless — if you can rent your property out at all — and oversupply means that huge numbers of properties not only aren’t making capital gains but are often worth less than they were bought for. Much of Bulgaria has turned into one great big building site. And, from what I gather, not a very efficient one either.

Buying at home is hard and buying abroad is harder: you need to know what you are doing, you need to go into it with cash in your pocket rather than expecting it to make you rich, you need to have a good lawyer and to read all the small print in the contract, and you need to be prepared for all sorts of difficulties you have never thought of to turn up. Remember for example that in Eastern Europe the rules still aren’t the same as they are in the West. The level of legal protection available to the consumer is different; corruption is common; wars have muddled ownership issues, so buyers often find themselves caught up in endless battles over title; building standards can be poor; and differing tax and inheritance laws can make things very confusing to say nothing of expensive.

Finally, it is worth noting that buying a property abroad, wherever it is, comes with all the same difficulties as it does at home — voids, repairs and the like — only in a foreign language. This might all be worth it if you are making piles of money in capital gains. But if you are not it probably isn’t.

The global property bubble is coming to an end (think Spain where prices are still falling all over the Costas and even the biggest developers are scrambling to get out of the market). In the last decade a lot of people have made money owning property abroad. But from now on it’s hard to think that prices are going to go up much anywhere (except in some parts of Asia). That means that owning abroad is more likely to bring boring admin problems than profit — see my Moneyweek section on investing in property for more on the end of the property boom.

And that suggests that we’d all be wise to stop thinking we have to make money out of houses and start thinking about how we can best live in them, both at home and abroad. That means stopping combining holidays with property investing and renting a house — or perhaps even a hotel room – when you go on holiday.

For more tips and advice, visit the personal finance pages of the MoneyWeek website: Personal Finance or click here to compare products including saving accounts, personal loans and more: Best deals