MONEY BOX

Presenter: Paul Lewis

TRANSMISSION 10th November 2001 1200-1230 BBC RADIO 4

Savings and Mortgages

Direct Debits

Pension Performance Tables

Islamic Investment

LEWIS: Hello in today's programme - savers pay the price for the lowest mortgage rate for forty six years. Martin Lewis is with me today

M LEWIS: I'll be looking at the first U.K based pension plan that complies with Islamic law.

LEWIS: We hear from the man who saw money mysteriously disappearing from his bank account.

MAN: It makes wonder whether any company can just go along to my account and take money in this way.

LEWIS: And will new efficient tables help us choose the right pension?.

First though 26th February 1964

Song: "Smile for me my Diane...."

LEWIS: The Bachelors with Diane, number one in the chart thirty seven years ago, the last time bank interest rates were 4% . It was the month Cassius Clay became world heavy weight boxing champion, beating Sonny Liston. The Beatles were mobbed at Heathrow after their first trip to the USA, and ten pound notes were issued for the first time since World War II a different world indeed, but this week the Bank of England took us back to 1964 when it cut base rates by half a point to 4% but that's bad news for savers, but Money Box listener Barry says it's bad news for borrowers to.

BARRY: I'm both a borrower and a saver with Abbey National, whilst I've seen mortgage rates come down slightly over the last few months, I haven't felt that I've benefited from the full interest rate cuts that have happened. Whilst on the other hand as a saver I've also had my interest rate cut so I feel like I've been losing out on one hand and loosing out on the other hand whilst Abbey National sits in the middle protecting its profit whilst wageing a propaganda war that everybody is benefiting with Abbey National whereas the reality is very much different.

LEWIS: Well lets now talk to Janet Connor, Director of Retail Marketing at Abbey National. Janet not a very happy customer there. Abbey hasn't passed on the cuts in mortgage rate - has it - why ?

CONNOR: Abbey National has taken the decision that we would like to protect savers as interest rates reduce as you said to the lowest levels in forty six years and so we passed on some of the base rate change to the borrowers and been able to protect savers.

LEWIS: But you haven't really protected savers- have you ? You gave a pledge in September to do that but since then you've cut mortgage rates by a quarter percent, but you've cut the interest paid out on many of your savings account by more than that - 0.3 percent.

CONNOR: The average cut across all savings accounts have indeed been a quarter of one percent, some tiers on some accounts have seen cuts up to 0.35 percent but the average has been twenty five but I think the important thing to remember as well is that all savers have borrowed by at least 0.15 percent, unlike with the competition.

LEWIS: Yes but I don't see how it's protecting savers, because you've admitted some of them have actually seen their rates reduced by more than the amount you've cut off your mortgage rate, so you're not protecting all your savers in fact your penalising them, as indeed Barry said on both hands.

CONNOR: Well savers have been protected in two ways, one is by benefiting by at least 0.15 percent but for the majority by 0.25 percent and also we delayed the passing on of the rate change to the 1st November so we passed on rates later than the competition, so savers could enjoy the higher rate for longer.

LEWIS: Now you've got another cut coming to savers presumably after this weeks decision will that be less than the cut you've made to the borrowers ?

CONNOR: We've reduced our standard variable rates on this occasion by 0.4 percent against the change in base rate by 0.5 and what we will be continuing to do is balancing the need for savers and the average change again will not exceed the change that we have made on our standard variable rate, again we will be protecting savers.

LEWIS: The average change will be 0.4 but some savers could lose more than that ?

CONNOR: Some tiers on some accounts will be moved by up to 0.5 but the average will be 0.4

LEWIS: Janet Connor from the Abbey National thanks for talking to us. Well listening to us in Bath is Anna Bowes of the independent financial advisors Chase DeVere. Anna are savers suffering generally?

BOWES: Yeah I'm afraid it is looking quite bleak for cash savers at the moment with all the interest rate cuts, especially as inflation hasn't been moving down at the same time of course.

LEWIS: And we've had e-mails certainly complaining that savings rates have been cut by more than the base rate changes, are they just cashing in on this some of these institutions.

BOWES: Well it does appear that it does certainly happen that rates are cut by institutions by more , and as we've heard mortgage rates are cut as much, so I'm sure that there are some advantages to be taken.

LEWIS: Yes- I mean some institutions already Bank of Scotland, Northern Rock, Smile, Virgin, West Bromwich have already cut the amounts paid to savers by the full half percent just two days, within two days, of the decision.

BOWES: Yeah- I don't know where they're applying from but, but certainly to announce it so fast and it does mean another hit to savers and in some cases for higher rate tax payers now their cash is going to be earning less than the rate of inflation so their actually losing out.

LEWIS: Yes so that makes it all the more important to find the best rates, there are pretty good rates still around in particularly if you go on the internet aren't there?

BOWES: There are. In fact Abbey National are one of those accounts that are offering - the more

LEWIS: Well on one of their accounts

BOWES: On one of their internet accounts, on a couple of their accounts - yes certainly there are some awful rates as well but they are offering some very competitive rates there. You can get sort of 4 percent at the high street and up to sort of 4.75 percent if you're looking at, in fact 4.95 percent if you're looking at some other accounts.

LEWIS: So briefly do you think the internet is the way to go to get the very best rates on your savings ?

BOWES: You have to shop around because the competition is fierce so it certainly is a good way to go - the leading rates have fallen slightly on internet accounts but certainly worth looking at those if you're happy with the security aspects.

LEWIS: Anna Bowes from Chase DeVere, thanks for talking to us. Well if savers are suffering are home buyers benefiting? With me is Ray Boulger from the mortgage brokers, Charcol. Ray, Abbey in the minority here most other lenders have announced what their doing and have passed on the full rate cut to borrowers - haven't they ?

BOULGER: They have indeed - most lenders who have announced cuts so far have cuts between 0.4 percent and 0.5 percent . Paul, just to put the record straight on Abbey with regard to what Janet said. I think it's worth making the point that although most lenders cut their rates in two tiers, one after the September 18th cut, and one after October 4th cut, Abbey actually delayed their first cut so their borrowers didn't get a cut until November 1st either like their savers.

LEWIS: Yes - I mean it's all very complicated though isn't it to know how to keep up, we certainly added the rates up over a period and it seemed they weren't being quite fair because people do different things at different times it makes comparison all the more difficult.

BOULGER: What tends to happen is when rates are coming down and indeed to be fair when rates are going up lenders announce their new mortgage rates very quickly afterwards. They tend not to announce their new savings rates until towards the end of the month but normally both of them get implemented for existing customers at the beginning of the following month.

LEWIS: Now lenders can choose obviously how they cut their main rate, their standard variable rate, but some people now have tracker mortgages, mortgages that follow the base rate, do those have to keep on coming down?

BOULGER: Absolutely -although it does depend on what the terms of the tracker are, there are some life time trackers, like for example the Woolwich Open Plan Offset which is guaranteed to be 0.75 over the life of the mortgage and there are other tracker for a certain period perhaps two or three years were you have a guaranteed margin above or below bank base rate for that period.

LEWIS: But there could come a time with some of them couldn't there where if it's guaranteed below base rate where there would be nothing left at all.

BOULGER: Well theoretically that's absolutely possible, obviously in Japan they've got interest rates at 0 percent so yes that's theoretically possible

LEWIS: And of course 2 percent in the State so who knows where we'll go, but there are something called collars which appear to follow them down but then there's a limit below which they'll go.

BOULGER: Yes this is something which has just been introduced in the last couple of years by some lenders whereby they say that normally on their discount deals there is a limit below which the rate won't fall, typically that tends to be 3 percent all the collars at the moment are at between three, three point five so you do have to watch that if rates fall sharply.

LEWIS: So we could be approaching that zone . Now obviously if people think their lender hasn't been fair to them the options are to re-mortgage, if they're free to do that. What are the best deals around at the moment ?

BOULGER: I think the key thing people have to decided is whether they want the protection of the fixed rate or whether they want to take the view that rates will keep falling . I would either go for a tracker rate, and you can get rates as good as bank base minus one percent for two years with no penalties afterwards, or go for a fixed rate. And now you can get rates below five percent for periods of up to five years there is a strong argument I think for a five year fix at that level.

LEWIS: Ray Boulger from Charcol thanks very much. Details of whose mortgage rates are cut and when and by how much are with our audience line.

Now Direct Debits are undoubtably a convenient way to pay your regular bills telephone, gas, electricity and so on. You give a company the right to take any amount of money out of your current account and your bill is magically paid every month. Some companies find them so convenient they offer a discount if you agree to pay that way but many people don't like them, fearing they give to much power to the companies and their scope for mistakes. Money Box listener Bill Pearson is one man who's learnt to be cautious about direct debits, he'd stopped using his Barclays current account and was very surprised to see a new direct debit payment taken from it.

PEARSON: I recently had a cable modem installed by NTL and wanted to pay my monthly bill by cheque. I did not sign a direct debit mandate and quite suddenly money was removed from my Barclays account to pay the NTL bill. I contacted Barclays and asked who'd authorised the direct debit payment and no one had, now that came as a nasty surprise and I was told that under certain circumstances any company can remove money from my account, I couldn't understand this.

LEWIS: Well naturally Bill turned to Barclays again to see what had gone wrong, it blamed NTL saying the company had used old information from a previous direct debit authorisation. NTL doesn't dispute it was it's fault.

MAN: Prior to August 1999 Mr Pearson had two accounts with NTL one for his telephone and another for cable T.V. each covered by separate direct debit. In August he cancelled his T.V. account and we advised him to cancel his direct debit. Normally at this stage NTL would deactivate the account but unfortunately human error meant that this did not happen, the direct debit remained open. In July he subscribed to a cable modem service, when his first bill was due the computer erroneously identified his former T.V. account as his new one and the dormant direct debit automatically kicked in again.

LEWIS: Well two mistakes there, one by a human, one by a computer, and they led to Bill being charged for his new NTL service from a defunct bank account and without his authorising it. Well listening to that sorry tale in Guildford is Richard Tyson Davies from APACS which runs the direct debit system. Richard mistakes made there- but it is frightening isn't it that money can be taken out on an old direct debit authorisation ?

DAVIES: Well these things do happen but I have to say that mistakes are pretty rare and as I was driving down here today I concluded that you're more likely to actually win the lottery than have a serious mistake with a direct debit that wasn't sorted out.

LEWIS: But one chance in fourteen million really

DAVIES: Yes that's right. This one's been sorted out. Yes there were errors here and one thing he could have done that hasn't been mentioned of course is that the direct debit scheme allows you a money back guarantee if anything goes wrong. He could have gone to Barclays and said I want my money back now and they would have had to have given it to him.

LEWIS: Well indeed and I think that's probably what's going to happen but that guarantee depends on people spotting it, Bill did spot it because it was a defunct account but if you've got a small amount coming out of your current account you might not notice it, might you?.

DAVIES: That is certainly true but I think more and more with modern banking systems and other systems you really do have to look at your statement each month, read it through, did I do that?, do check it, if there is something wrong please tell your bank right away and I say that the direct debit scheme does guarantee everything .

LEWIS: But that's putting the onus on us to check that they banks haven't made a mistake

DAVIES: I fear that's true, there are no systems that are absolutely foolproof and modern banking systems which now cope with a large proportion of the adult population, hundred million current accounts in the U.K. Yes, there is going to be automation I'm afraid that's unavoidable.

LEWIS: And it's getting more automated isn't it- there is now a way that some companies can take direct debits without written authorisation at all .

DAVIES: That is certainly true as well. Indeed for many years the majority of direct debits, the form you signed, has never actually reached your bank it's retained by the company originating the direct debit, that has actually improved the performance of the scheme enormously because it's taken out the potential for clerical error.

LEWIS: But it's also increased the potential for mistakes, is there ever any written confirmation sent to you in these cases ?

DAVIES: There certainly is. If you have signed up to what we call a paper less direct debit , you've done something over the telephone, the company taking that new direct debit instruction has to follow a fixed script that they've agreed with their bank and their bank is underpinning all this and they have to confirm with you in writing within three working days that you have signed up.

LEWIS: But of course if they confirm it and then take it out of the wrong person's account, that person may see money disappearing for no apparent reason.

DAVIES: That is certainly true - hence you've got to check your statement.

LEWIS: Richard Tyson Davies thanks for that timely advice I shall certainly go home and check mine.

This week the Financial Services Authority published tables which compare almost ninety different personal and stakeholders pensions. Nearly all major providers allowed their schemes to go into the table but a couple didn't including one big one - Skandia Life. Jo Gilby from Skandia explained why.

GILBY: Our primary concern is that consumers will be led into which pensions to buy on price alone. Pensions are complex products and there are many other factors to be taken into account, for instance flexibility, matched to individual needs and performance potential. Whilst charges do have an impact by far the greatest potential contributor to the value of your pension at retirement is good solid investment performance.

LEWIS: So I asked Christine Farnish the Consumer Director at the Financial Services Authority - why they had left out past performance information.

FARNISH: Actually what people want to know is future performance not past performance, and the difficulty starts if past performance doesn't tell you what the future performance is going to be. But we do recognise the strength of feeling on this subject and if we can find a standard fair way of showing past performance in a way that's comparable then we will include it in the tables.

LEWIS: Looking at what you do have - do you think there is too much emphasis on charges because they're not the biggest factor in looking at how a fund does over twenty, thirty, forty years .

FARNISH: Well charges do actually make a huge difference to what you will get back at the end of the day, more so than most people realise so I wouldn't say that it was wrong to have more transparency of charging information. I would say that was a helpful thing in this market, but you're absolutely right charges aren't the only thing people have to think about. They need to particularly think about where their money is being invested, how risky it is and what other investments they've got in their overall portfolio.

LEWIS: Well of course none of those things they can find from these tables

FARNISH: Paul if we put absolutely all the information in the tables we suspect they would be quite unusable. What we're doing in these tables is using selective bits of information that we think are important and relevant to consumers decisions. But we'd be very interested in what your listeners think should be added to the tables.

LEWIS: Once they've looked at the tables - what should people do to pick the right pension for themselves ?

FARNISH: I would always say with something as complicated as a pension that people would be foolish to go and buy without first taking expert advice.

LEWIS: But with some of the very cheapest pensions IFA's would be reluctant even to advise on them because their is no money in it for them.

FARNISH: Well that's why these tables are a very useful tool, a bit of ammunition for consumers to have, because they do help them have better informed discussions, we think, with their advisors.

LEWIS: Christine Farnish from the Financial Services Authority. Well with me is our own expert advisor Michelle Cracknell, Director of Pensions from Independent Financial Advisors, A&B. Michelle as an IFA would you welcome a customer coming to you armed with information coming from these tables.

CRACKNELL: Yes I think it's always more useful talking to customers who are informed but choosing the best product is only a very small part of the process and actually the first thing that needs to be decided is what product is right for the individual.

LEWIS: Yes of course- lets assume people do want a pension and they go to these tables how useful are they to make a decision without an advisor, is there enough information ?

CRACKNELL: I don't think, so it's very much focused on the charging element and has been said by both the FSA and Scandia Life the charges are only one small element of whether the product is best. And I think the old adage that cheapest is not always the best needs to be remembered when looking at the tables.

LEWIS: Yes the tables certainly stress that. You can sort them by charges you can look at the cheapest and that's about it when it comes to quantitative information - isn't it.

CRACKNELL: That's my biggest concern about the tables the filters are very much focused on the charging element.

LEWIS: And what about past performance, I mean we know the FSA view that it doesn't really help you choose future performance - is it of any value to customers to know how a fund has done in the last five, ten, fifteen years ?

CRACKNELL: I think it's useful for the customer to know what kind of fund manager their with and if their going with a fund manager who has achieved spectacular results then they should expect to have a more rocky ride than perhaps the ones that have performed around the average. So I think past performance does give you a guide to the flavour of fund manager you're investing with.

LEWIS: And will IFA's advise on any pensions even though some of them are now sold so cheaply there's basically nothing in it for IFA ?

CRACKNELL: I think IFA's obviously need to be remunerated and some IFA's are only remunerated in the form of commission and therefore they're not going to be advising for some of the products that appear in the table that are only sold direct.

LEWIS: So fee base advice is best ?

CRACKNELL: Yes

LEWIS: You would say that wouldn't you

CRACKNELL Yes

LEWIS: Anyway Michelle Cracknell, thanks. People are going to have to get used to paying for it I think. If you questions about pensions you can call our Money Box live on Monday afternoon here on Radio 4 with Vincent Duggleby and indeed Michelle Cracknell will be one of his expert guests.

There are more than two million Muslims in the U.K. but there is only one U.K. based investment fund that complies with Shar'ia - Islamic Law. The Parsoli Global Islamic Equity fund launched in May already allows ISA investments and from this month it will begin taking pension investments too. Our reporter Martin Lewis is here. Martin, what are the implications of Shar'ia for finance.

M LEWIS: Well Paul the primary rule is you can't benefit from, or earn interest on your money, this can make finding even standard financial products difficult, as these London Muslims explained it's tough to keep your finances Shar'ia compliant.

WOMAN: In Islam we're not suppose take interest but it's quite difficult to live here without doing that. I won't say that I'm hundred percent OK I'm still having monies in the bank.

MAN We couldn't find anything so it's not totally Shar'ia compliant.

M LEWIS: Though interest is not allowed - capital growth is. There's a range of Shar'ia compliant funds but most are based off shore and have large minimum investments . Parsoli's minimum is just one thousand pounds and as it's U.K. based it can take advantage of ISA and Pension tax concessions. But when it comes to investment complying with Shar'ia is about more than just avoiding interest. Habib Akudi is a director of Parsoli.

ACUDE: The fund manager first and foremost, will put to one side companies which are involved in fixed interest, conventional banking, in pork or haram meat or pornography or alcohol. Companies essentially where the main source of income is involving activities which are contradictory to Islamic practices and beliefs.

M.LEWIS: After that the fund manager picks the shares on investment grounds. However Shar'ia compliance comes at a cost, the fund has an initial charge of five and three quarter per cent and an annual charge of two and a quarter - that's at the very high end for an investment fund, though as it's the only fund of its kind for investors who follow Shar'ia there's no alternative.

I went to central London's World Muslim League mosque and asked Shar'ia expert, Dr Suhaib Hassan what he thought of the fund

PASSAN: People are going to welcome it but there is one thing I must say that, so many people have started different types of scheme and none of them flourished or was successful. So this is why people would be very careful and scary of such a project

M LEWIS: Many other members of the mosque were sceptical too. Some questioned whether the fund was truly Shar'ia compliant. Parsoli may have a tough time convincing its target market to invest. However, Lee Coates of independent financial advisors, the Ethical Investors Group, says the fund will appeal to some interest groups outside the Islamic community

COATES: It'd be suitable because of the very strict policy on pornography production and distribution. It'd also be suitable for vegetarians and vegans who would require avoidance of companies associated with the meat trade and for the wider ethical investment community it would be an interesting product to bolt on to an existing ethical portfolio.

M LEWIS: However investors are often cautioned that special interest funds can be riskier than general funds, though Parsoli's Habib Akudi says the conservative requirements of Shar'ia offset this.

ACUDE: The criteria being followed Islamically essentially leads to the companies chosen being low risk, high quality blue chips and geographically because the structure of the fund is worldwide diversified portfolio, the risk will be spread as well.

M LEWIS: But this fund is new so its track record is limited and it mightn't be easy to get advice from an IFA. Stella Rice, Head of Ethical Investment for IFA's Harburn Financial

RICE: Most IFA's wouldn't have a clue how to advise in the area of Shar'ia investments, which is a real shame really because most Muslims possibly won't have the idea of where to turn to in order to get the appropriate advice. What I suggest is needed is more training.

LEWIS: Stella Rice of Harburn Financial. Martin, what training in Shar'ia is there for financial advisors?

M LEWIS: None Paul. There are no formal exams for any ethical investing, never mind for specific areas like Islamic investment.

LEWIS: And this fund, why is it so dear?

M LEWIS: Parsoli says this is because it has to pay for the religious advisors who ensure it's Shar'ia compliant. However most standard ethical funds are cheaper and they also have to pay fees to EIRIS, the ethical investment research society. You can invest in Parsoli at lower costs though, roughly half the initial charge, if you don't want advice by buying it through a discount broker.

LEWIS: Thanks Martin. And that's almost all we have time for today. You can get more information about the items on the programme by calling the BBC actionline 0800 044 044, calls are free on 0800 044 044. You can look at our website www.bbc.co.uk/moneybox and those who do look at the website will know that we do refer to ourselves there as the award winning BBC programme and some listeners have asked what this means. Well this week we won two more at the Bradford and Bingley Personal Finance Media Awards on Tuesday 'Money Box Live' was named Best Broadcast Programme of the year and Money Box itself won a special commendation for our coverage of Equitable Life. There's more personal finance throughout the week on Working Lunch, BBC2 at 1230. Money Box is back at the same time next week. Today the reporter was Martin Lewis, the producer was Jennifer Clarke, and I'm Paul Lewis.