This means that the Office of Fair Trading will not now be able to investigate the fairness (or otherwise) of unauthorised overdraft charges.

Clearly this news is a blow for the millions of banking customers who stood to be able to reclaim billions of pounds in bank charges.

It’s also pretty bad news for the claims management firms who appear to have cropped up in recent months specifically to handle these claims, some would say unnecessarily.

Good news for some

It is good news, however, for the banks and their shareholders, which includes the taxpayer in a number of cases.

The banks stood to lose up to £2.6 billion in annual revenues from this source – a huge amount of money, but not much in the overall scheme of things when it comes to banking profits.

Barclays alone made a profit of nearly £3bn in the first half of this year and HSBC reported a similar figure. The UK banking sector makes somewhere in the region of £20bn in profits every year.

The myth of ‘free’ banking

One possible consequence of the banks losing their case this morning was an end to ‘free’ banking. Of course banking is not and never has been ‘free’.

The charges associated with using banking services might not be particularly explicit, but they certainly exist and can be substantial in some cases.

Here are just a few of the ways you pay for banking services, even if you have not suffered unauthorised overdraft charges.

1 – Fees for premium accounts

You’re probably familiar with this deal. Banks might not charge explicit fees for conventional current accounts but they do charge them if you ‘upgrade’ to a premium account.

These typically come with a bundle of services you might or might not purchase elsewhere. Often this will include breakdown cover, travel insurance, mobile phone insurance and commission-free currency exchange. Oh, and of course a shiny debit card.

If you go to the open market and research the individual cost of each service, it might look like a reasonable deal in comparison. The problem arises when you do not actually use all of the services or they are services you would not have purchased ordinarily.

For example, you might find your mobile phone is already insured as part of your home contents insurance and you can just as easily exchange your cash for foreign currency at the Post Office with no commission charges.

2 – Lower interest rates on deposits

This is a big source of profit for the banks. When you deposit money with them, either within a current account or a savings account, the rate of interest you receive will be less than the amount of interest or investment return they will earn on your money.

Apathy is an important part of this source of profit for the banks. They might attract savers with a market leading interest rate on their savings account, but then after a year or more reduce this to an uncompetitive level. They do this because they know most customers will not bother to move their money to another bank. They profit from your apathy.

The best way to minimise this cost of banking is to keep your accounts under regular review and move them when you need to move them. The more proactive bank customers become when it comes to getting the most competitive interest rates, the more competitive each bank will need to be to retain their customers.

3 – The higher cost of borrowing

As well as savings, there is a margin when it comes to borrowing.

When you take out a personal loan, mortgage or credit card, the cost of borrowing (the interest you pay on your debt) is much higher than what it costs for your bank to lend you the money.

Banks also make profits from you by charging arrangement fees and redemption fees on loans. In addition, they like to bolt-on expensive insurance policies when selling debt.

4 – Uncompetitive financial products

Perhaps the least explicit way in which the banks made money from their customers is through the sale of uncompetitive financial products. This includes protection policies (including life assurance) with uncompetitive premiums and investment products with high charges and poor performance.

Banks typically offer financial products from one provider or, at best, a limited panel. Because of this, the terms available on these products are unlikely to be the best across all areas. The only way to ensure you consistently get the best terms is to use an independent financial adviser, or at least shop around to get the best deal.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford.

They are undeniably popular. Their allure comes from a combination of capital security and the chance to win tax-free prizes. Since the global financial crisis really got going last year, security of cash has become an even more important factor when deciding where to keep your money.

But are they worth it? Whilst lots of us own them, many people tell us that they have never won a prize. When compared to the most competitive interest rates available from ordinary savings accounts, the interest rate used to calculate prizes is fairly pitiful. In this article we separate fact from fiction and help you understand whether Premium Bonds are the right home for your cash.

A history lesson

Before we look at the basics, here is a brief history lesson.

Premium Bonds were launched on 1st November 1956 after Harold Macmillan announced them in his April Budget report as a method of reducing inflation and encouraging thrift. £5m worth of Premium Bonds were sold on the first day.

The first prize draw did not take place until June 1957, but by that time over £82m had been invested in Premium Bonds. Over 23,000 prizes were awarded in that first draw and the top prize was £1,000.

After this positive start, the total amount invested in Premium Bonds peaked at around £4bn in the early 1990’s before really taking off in terms of popularity. By 2008, £40bn was held in Premium Bonds.

The basics

A big attraction of Premium Bonds is the relative simplicity of their design. The rules are fairly easy to grasp even if you are usually intimidated by financial products.

Anyone who is 16 years old or over can invest. Under 16’s can also own Premium Bonds if a parent, grandparent or legal guardian buys them on their behalf.

The minimum investment is £100 and the maximum holding per person is £30,000. There is no set investment term and each month your Bonds are entered into the prize draw.

Your money invested in Premium Bonds does not attract interest each month. Instead, you stand the chance of winning a tax-free prize (more on these in a minute).

However, your capital is very secure. Money within Premium Bonds is backed by HM Treasury. This means that there should be no real concerns about default risk or having to resort to the Financial Services Compensation Scheme (FSCS) for compensation.

Meet ERNIE

ERNIE is the Electronic Random Number Indicator Equipment. Since the introduction of Premium Bonds in 1957, ‘he’ has been the one responsible for selecting prize winners. Today, National Savings & Investments is using the fourth generation of ERNIE.

His randomness is ensured by a monthly check by the Government Actuary’s Department (GAD). They then issue a certificate to confirm the randomness of the machine, which is needed before NS&I is able to pay out prizes.

The monthly prize draw includes one £1m jackpot. The other prizes range from £25 to £100,000. For October 2009 the total prize fund was £52.4m and 1,749,056 prizes were distributed in total.

The odds of winning any prize each month (which could be £25 or £1m) have been calculated at 24,000 to 1. In simple terms, this means that for every 24,000 eligible Premium Bonds there is one prize.

This can be compared to the National Lottery, where the odds of winning any prize are in the region of 54 to 1. However, this is a difficult comparison to make because with the National Lottery you lose your ’stake’ each time you enter.

The odds of winning the Premium Bond £1m jackpot each month are in the region of 40,000,000,000 to 1.

Are they worth it?

This is the one million pound question. The prize fund is calculated by reference to a notional interest rate applied to all holdings in Premium Bonds. This interest rate is tax-free and currently stands at 1.5%.

This means that, regardless of your income tax status, if you hold £100 in Premium Bonds you might expect an average annual return of £1.50. If you hold the maximum £30,000 then your average annual return would be £450. Of course many people will receive nothing and some will receive more. It’s a gamble.

Compare this to one of the most competitive instant access savings accounts at the moment; West Bromwich Building Society is offering 2.85% gross with its Branch Easy Access Saver. For a non-taxpayer with £30,000 in savings this means annual interest of £855. Basic rate taxpayers would expect £684 and higher rate taxpayers would receive £513 of net interest.

There are some key differences between Premium Bonds and savings accounts. With the savings account you would know in advance what level of interest you should expect to receive in the year. With Premium Bonds you can have an average prize expectation in a given year. Equally, you might get nothing or you might receive more.

From a capital security perspective, and because the maximum Premium Bonds holding is £30,000, the equivalent amount in savings with a UK financial institution would come under the £50,000 limit of the Financial Services Compensation Scheme (FSCS).

The inflation argument

One argument often made against Premium Bonds is, whilst your capital remains secure and invested for future prize draws, the ‘real’ value of your cash is eroded over time by price inflation. This is because a rate of interest is not physically applied to your cash but future increases to the value of your capital depend entirely on winning prizes.

In the current economic environment, this is less of a concern. The Retail Prices Index (RPI) measure of inflation was -1.4% for the twelve months to September 2009. This means that, even if your Premium Bonds did not win a prize during the past twelve months, the purchasing power of your capital would have improved.

During times of positive price inflation this would not be the case. In fact, it doesn’t get much better if your cash is in a bank or building society account earning interest. Cash is not the place for holding money longer term if you want to maintaining purchasing power and protect it from inflation erosion.

Should you buy them?

Premium Bonds have mass-market appeal. They combine a simple financial product, capital security and the chance to win tax-free cash prizes. In fact, there isn’t a huge amount not to like about them.

They might not be the right home for all of your money, but as a way to take more of an interest in your financial planning and participate in a lottery without losing your stake, they are pretty tough to beat.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford. He used to have some Premium Bonds, never won a penny, got disheartened with the whole thing and sold them.

Yesterday evening we heard Mervyn King, the Governor of Bank of England, explain that British people will be paying the price for this financial crisis for a generation. He described the £1 trillion cost of the government bank bailout as “breathtaking”.

In addition to the bank bailout, the Bank of England continues to embark on their ‘asset purchase programme’, at a total cost of £175 billion. The amount of money allocated to this quantitative easing was increased by £50 billion in August.

Looking at massive numbers like this is one thing, but what will the real cost of economic recovery look like? What impact will all of this spending and money creation have on our personal financial planning in the years to come? Here are some educated guesses.

Higher taxes

Having to pay more taxes, particularly if you are a higher earner, seems inevitable if the Government is going to be able to reduce massive levels of public borrowing in a reasonable length of time.

A new 50% income tax rate for people earning over £150,000 a year is being introduced on 6th April 2010. This replaced the originally proposed 45% income tax rate for higher earners, which was due to come into force for the 2011/12 tax year. Whilst this is only likely to have an impact on 1% of earners, it will mean around £220 per month in additional income tax for people earning £150,000 a year.

People earning over £100,000 a year will see their income tax personal allowance (the amount of earnings on which you pay no tax) removed in stages from next April. Those earning £113,000 or more will have no personal allowance. It will be removed at a rate of £2 for every £1 of earnings over £100,000.

But will these higher taxes for big earners go far enough? The National Institute of Economic and Social Research (NIESR) suggested today that the basic rate of income tax will also need to be increased from 20% to 27% to pay off national debts.

In January we will all see Value Added Tax (VAT) return from the current level of 15% back to 17.5%. There is every chance that it could go higher than that. Britain has one of the lowest VAT rates in Europe, with the average (according to research from KMPG) standing at 19.8%.

Later retirement

Working longer and retiring later formed a key part of Tory proposals for public finances during party conference season. They suggested raising the State pension age from 65 to 66 (for men and then eventually women) starting from 2016.

We are already on track to see the State pension age increased to 68 for men and women from 2044, but more recently commentators have been calling for these necessary increases to be brought forward and even extended to age 70.

The National Institute of Economic and Social Research (NIESR) said today that the State pension age will need to be 70 if national debts are to fall to acceptable levels by 2015. The Institute of Directors (IOD) has also called for the State pension age to be increased to age 70, ‘as soon as is reasonably practical’.

Increasing the State pension age saves a huge amount of money each year; money that could be used to both reduce national debt and improve pension payments to older people. However, any sudden rise in State pension age is likely to be very unpopular, particularly if it leaves little time for people approaching the current State pension age to plan for the changes.

Price inflation

We are living in a low inflation environment, with the Retail Prices Index (RPI) recording inflation including mortgage interest and housing costs at -1.4% for the year to September.

The Consumer Prices Index (CPI) measure of inflation fell to an annual rate of 1.1% for the twelve months to September, down from 1.6% the previous month. This remains below the Bank of England target of 2% and is significantly lower than the spike of 5.2% recorded just last year.

Analysts are divided on the eventual level of price inflation in the medium to long term, but many expect an moderate (if only temporary) increase later this year. Petrol prices and the cost of clothing are expected to continue to rise, and these items could contribute to an increase back towards the 2% level by the end of this year or early in 2010. The increase in VAT from the start of next year will also feed back into inflation figures.

We might continue to benefit from negative or very low price inflation for another year or so, but eventually various pressures – including the impact of the government printing money – will feed through and result in a return of inflation figures we have been more used to seeing historically.

Low interest rates

Last week we saw a prediction from the Centre for Economics and Business Research (CEBR) that the Bank Rate will remain at 0.5% until at least 2011 and then stay under 2% until 2014.

The historically low Bank Rate has not necessarily resulted in lower borrowing costs. For those fortunate to be on Base Rate Tracker mortgage deals, most of this year has been a very pleasant experience with mortgage payments slashed to tiny amounts as a result. New mortgage (and remortgage) deals remains reasonably expensive and difficult to obtain as the banks continue to repair the damage to their balance sheets.

Savers will also have to cope with this low interest rate environment. The only saving grace for savers is that negative or very low price inflation means the gap between the interest rates they can get and inflation is now at record levels. This results in the preservation of the ‘real’ buying power of their cash, although it is little consolation for those who rely on interest from their savings to supplement other income in retirement.

Public spending cuts

Reducing national debt is likely to mean substantial public spending cuts and then freezes on capital investment over the next few years. The various political parties might argue about where these cuts should fall, but the end result is less money within the public sector. In fact, the CBI has called for an extra £120 billion in public spending cuts to help bring the national budget into balance two years earlier than current government plans.

This might not have a major impact on all of us, although those in public sector employment are likely to experience only moderate pay increases and also job uncertainty.

If you are a user of public services (as the overwhelming majority of us are) then your experience of these in coming years is unlikely to be the same as it has been during the past decade. This could result in greater use of private sector alternatives for those who can afford them, particularly if we start to see key services such as the National Health Service (NHS) suffer.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow BrilliantWithMoney on Twitter @brilliantmoney and Martin @martinbamford.

Whilst both sit within the same overall asset class, they are quite different creatures. Understanding the difference between the two is essential from an investment perspective; particularly as they should both lie at the safer end of the investment risk scale.

The decision earlier this month by Threadneedle to close their UK Money Securities fund highlights some of the issues faced by these money market funds. This was the fund slated last year after a run of poor performance.

Last year also saw Standard Life having to bail out one of their money market funds after a period of poor performance leading to a unit price adjustment.

So just what are the differences between cash deposits and money market funds, and how should you decide where to allocate the ‘cash’ part of your portfolio?

Cash versus money market funds

Cash deposit accounts need little by way of explanation. It is safe to say that most investors have had some personal experience of these, via their bank or building society, in the past. In most cases you deposit your cash, it earns an agreed rate of interest and this is added to your capital. As the annoying Meerkat puppet from the price comparison adverts would say, “Simples”!

Money market funds are quite different.

Whilst they aim to deliver cash like returns, they do this by investing in a variety of cash instruments. These might include cash deposits, “near cash” instruments and short dated gilts. In basic terms, investing your money in a money market fund is not the same as placing your cash in a deposit account with your bank or building society.

Another key difference is charges. Whilst the profit is already priced in to the interest rate you get on cash deposits, with a money market fund you pay an annual management charge (AMC) to the fund manager. These vary depending on the specific fund, but are typically lower than the AMC you would expect to pay on other investment funds. For example, BlackRock Cash has an AMC of 0.4%.

The Money Market sector

The IMA Money Market sector has had a reasonably good twelve months, even in light of falling interest rates on cash.

The top performing fund over the past year has been Invesco Perpetual Money. It has returned 3.97% compared to a sector average return of 0.94%. Most very cautious investors would be satisfied with nearly 4% against a Bank Rate of 0.5%. Even the sector average return is nearly twice as much as the Bank Rate.

At the bottom of the pile is Threadneedle UK Money Securities, already marked for closure by 14th December 2009. This fund has returned -21.67% over the last year. Investors who were expecting cash like returns from this fund would be rightly disappointed to lose over a fifth of their investment during the past twelve months.

When things go really wrong

After the near collapse of the global banking system, more people than ever before are now well versed with the intricacies of the Financial Services Compensation Scheme (FSCS). This is the scheme which provides protection to savers and investors in the event of a regulated firm being unable to meet liabilities. It is an important safety net and has been beefed-up as a result of recent banking shenanigans.

With a cash deposit in a UK regulated financial institution, the compensation rules are pretty easy to understand. It covers 100% of deposits of up to £50,000 per person. This applies per firm and per type of claim.

It is important to note that any liabilities (such as mortgages or loans) you have with an institution would get knocked off the value of your savings before a claim was assessed, so having more debt than savings with one bank can effectively wipe out your FSCS claim if they went bust.

Money market funds work differently. If the provider of a money market funds were unable to meet liabilities, the FSCS would still apply, but it would operate under slightly different rules.

Investment funds are covered with a total compensation limit of £48,000 per person, per firm. This is made up of 100% of the first £30,000 and 90% of the next £20,000.

However, by using a money market fund you should be spreading the risk associated with a single bank or financial institution going under. The fund manager will be diversifying your money by investing in a range of firms, reducing the risk that the collapse of one bank will force you to fall back onto the FSCS.

Why money market funds?

The main reasons for using money market funds rather than cash deposits are the potential for better returns and access issues.

I have already mentioned one benefit associated with diversification within money market funds; namely the reduced risk of one firm going bust wiping out your entire holding and forcing you onto the terms of the Financial Services Compensation Scheme.

Diversification should also work in your favour in a fluctuating cash market, where interest rates on offer are rapidly changing. The fund manager will be doing all of the hard work on your behalf, to ensure they are taking advantage of the best rates on offer, rather than forcing you to regularly shop around for a better deal.

Access is the thing that drives many investors to use money market funds instead of cash deposits. Put simply, many investment vehicles do not provide access to cash deposits. Invest your money in a personal pension, for example, and it is unlikely that you will be able to select a bank or building society account as an investment option.

Things get better if you are using a Self Invested Personal Pension (SIPP), where you should get access to a range of both options.

The most important lesson is that money market funds differ from cash deposits. They might get lumped together under the same broad asset class of ‘cash’, but they behave differently and get treated differently in some circumstances.

Know the differences and put yourself in a much better position to make a suitable decision with your money.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.

Now Which? has reported about a sharp increase in elderly people complaining about being missold investment products by bank advisers. As they attempt to rebuild their capital positions, it seems more likely that the banks will look to extract cash from their customers at every opportunity.

There are several things you can do to ensure you play it safe when dealing with the banks. Here are six things to watch out for to make sure your dealings with your bank are more financially advantageous for you than they are for them.

1 – Understand their limitations and motivations

Banks are businesses and their primary commitment is to their shareholders. Because of the relationship we tend to have with our banks, it is easy to think that they are always looking out for our best interests. Deal with them with from a more cynical perspective and you reduce the risk of becoming a bank sales victim.

In the vast majority of cases, the ‘advice’ you get from your bank will be either tied or multi-tied. This means that your bank financial adviser can only advise you on their own range of financial products. You do not get the benefit of the adviser shopping around for the best deal and you could well end up with an expensive, potentially unsuitable financial product as a result.

In fact, it gets worse than this. Bank advisers are often targeted to sell specific financial products. They will work hard to identify customers with cash on deposit and then convince them to invest that money instead, for the prospect of a higher return. Bigger returns always go hand in hand with bigger risks, but this might not be apparent when the bank adviser is pushing the sale.

The recent warning from Which? described complaints from elderly investors who were sold Investment Bonds thinking they were savings bonds with no risk to their capital. It wasn’t until these people received their first annual statement that they saw how much money they had lost.

Banks might call what they have to offer financial ‘advice’, but in reality it is financial sales. The only way to ensure impartiality when it comes to financial advice is to work with an independent financial adviser and pay an explicit fee for the advice, so that commission cannot influence the recommendations being made.

2 – Stay in the black

The ongoing unfair banking charges saga could still take some time to resolve. We know that the Office of Fair Trading (OFT) has already ruled these overdraft charges to be unfair, but the big banks are appealing this decision in the courts in an attempt to avoid having to refund customers.

Some overdraft fees were considered to be unfair because they cost the banks no more than £2.50 a time to process, but were charged sometimes in excess of £35 a time. This meant that the banks were profiting from a penalty fee, something which is not permitted under English law.

What is important to consider is that these unfair charges were only applied to banking customers who went into their overdraft. Go into the red within your bank account and you should expect to get charged. Whether that charge is fair or unfair, it is going to cost you money. Until the unfair banking charges case is finally resolved, you should expect a trip into your overdraft (even for a short amount of time) to result in a hefty charge.

Make every effort to stay in the black and you will avoid unfair banking charges. This means proper budgeting and cashflow management to stay in positive territory, but in this age of Internet banking it is simple to get a quick update of your bank balance before spending money that might tip you over the edge into the red.

3 – Read the small print

As boring as it sounds, reading the small print from your bank is an essential step before entering into any arrangements with them. Never sign up to something they recommend on the spot. Take the documentation away with you and take the time to read it carefully.

A golden rule when it comes to money management is to never sign up for something unless you understand it in full. The banks are generally quite good about being transparent with their product terms, but they can occasionally hide a nasty surprise in the terms and conditions of an account or investment product. By reading the small print, and getting a second opinion if necessary, you can prevent stepping into an unsuitable arrangement and avoid the hassle of getting out of it at a later date.

4 – Mix it up a bit

People tend to be very loyal to their banks, and this can result in buying a whole raft of products or services from one institution. A single provider rarely offers the best value across every different area. Putting all of your financial eggs in one basket is a poor financial move and one that you might come to regret in the long term.

Use your bank for what they should be best at – banking! The associated services they have to offer, such as financial advice and stockbroking, are usually provided with better value and suitability by other entities who specialise in these areas.

An added benefit of mixing it up a bit and not relying on your bank for every area of your financial life is that you can more easily walk away if things turn sour. Customers who have their current accounts, savings accounts, credit cards, mortgage, personal loans, investments, pensions and life assurance with one bank can find themselves in a tough position if they fall out with their bank over poor service or excessive charges on one account.

5 – Check your statements and stay organised

Banks sometimes make mistakes. Never rely on them to always accurately debit and credit your accounts. This means keeping good records and checking your bank statements on a regular basis. If you keep all of your receipts, cheque stubs and payslips, it should be relatively straightforward to quickly tick off each entry on your bank statement.

With the increase in popularity of Internet banking, many customers now opt not to receive hard-copy bank statements through the post. This should not remove the practice of checking your statements for accuracy. If you use Internet banking you might want to download your statements on a regular basis so you have your own record of these transactions rather than having to go online when you need access.

If you spot an error then flag it up to your bank promptly and insist they take action to rectify it. If the mistake is in their favour, present the facts and chase your bank regularly for a satisfactory conclusion. If the mistake in is your favour, do not assume it will not be spotted. Be as determined in your efforts to sort out the mistake and express your dissatisfaction with the bank for making it in the first place.

6 – Think twice about that ‘premium’ account

With the revenue from excessive overdraft charges looking increasingly ‘fragile’ for the banks, they will need to find their profits from other sources. This could result in the end of so-called free banking, and it is likely to encourage the banks to push their premium accounts.

These are current accounts that come bundled with a whole load of added value features, including things like travel insurance and breakdown cover. These special features come at the expense of a monthly account fee which can seem quite reasonable when held up against the list of goodies you get with the account.

In practice, the banks rely on their customers to believe the different elements of the package offer good value without actually checking this out for themselves. When considering a premium current account, think about the elements you actually need or can save money on if you already have them. Cost out the various elements you need or want separately to make sure the premium account offers good value.

Martin Bamford is site editor of BrilliantWithMoney and a chartered financial planner at Informed Choice.

In the current climate there is no simple way to get better returns without taking more risk with your capital. The only real solution is to shop around for the most competitive rate of interest and keep this under regular review.

There are several ’savings traps’ that make the hunt for a better interest rate more challenging. The higher headline rates on some best buy tables might look attractive, but always read the small print to make sure you avoid the following pitfalls.

1 – The introductory bonus

Quite often the highest rates of interest include an introductory bonus that only lasts for a short period of time. This can vary and may be as long as a year, but when it runs out the chances are your interest rate will revert to a less competitive level.

Banks and Building Societies use these introductory bonus rates to bring in new customers, because they know that for the majority of savers apathy will rule the day. Once the bonus period comes to an end, they will hang on to most of the savings business because their customers will not bother to move their money.

Introductory bonus rates are great if it means you can get the best rate of interest on your cash and you have the discipline to do your homework again when the rate comes to an end. Always make a note in your diary when you open the savings account with an introductory bonus rate and remember to shop around again to keep your interest rate competitive.

2 – Buy one of our lovely investment products

For the past few months the various best buy tables for fixed term savings accounts have been plagued by what looks at first glance like a series of very attractive interest rates. These great rates come with a nasty condition; you have to invest the same amount that you save in an investment product from the bank.

These are not just investment products but the type of investment product you would be slightly bonkers to consider using. These structured products tie up your money for several years, tend to disappoint in terms of actual returns and come with several hidden risks to your cash.

If getting the best savings rate is dependent on investing some of your cash as well, move swiftly on to the next best rate on the best buy table.

3 – Open a linked current account

Some banks will insist that you open a current account with them to benefit from the interest they pay on their competitive savings account. They ask that deposits and withdrawals into your savings account are made via your shiny new current account with them.

In most cases there is nothing wrong with this. Always read the small print to make sure there are no hidden banking charges on the current account to quickly eat up the benefit of the interest on your savings account.

Having to open a current account to get access to the competitive rate of interest on the savings account is usually nothing more than a mild inconvenience.

4 – Existing/new/local customers only

The small print on some competitive savings accounts includes restrictions on who can open an account. Some of the very small mutual Building Societies limit their accounts to savers who live very close to the branch. In practice you probably wouldn’t want to open an account with one of these institutions if the only way to interact with them involved a lengthy drive to the nearest branch.

Other accounts are restricted to new or existing customers only. Most banks and Building Societies are pretty upfront about these restrictions and you should not have to delve into the small print too far to find them.

5 – Fixing just before interest rates go back up

With interest rates currently so low, they are bound to go back up again at some point in the future. Nobody knows precisely when this will happen, but the smart money is on rates going back up at some point in the next twelve months.

If you have the choice between an instant access savings account and a fixed term account paying a more competitive interest rate, it can be tempting to opt for the latter. The rule of thumb when it comes to savings is that you get a better rate of interest when you are prepared to tie up your money for longer.

Make sure you do not lock your money away at relatively low rates of interest for too long and then miss out on rising interest rates. A one year fixed rate is probably safe, two years would be risking it and three years means you are more than likely to miss out.

6 – Lower interest when paid monthly

If you rely on your savings interest to supplement your income then you probably need to get that interest on a monthly basis. The most competitive savings accounts typically pay interest annually. Some of the fixed term accounts do not add interest until the end of the account term.

If you need monthly interest then compare interest rates on accounts which pay interest monthly. It sounds simple but it is often overlooked in the hunt for the most competitive interest rates.

7 – Tiered interest rates

What you see is not always what you get when it comes to interest rates on savings. The practice of ‘tiered’ interest rates means you may not get the high headline rate of interest on the entire balance of your savings.

Some of these accounts pay nil interest on the first part of your savings and then increasing levels of larger amounts. The net result is often a lower total interest rate than that advertised as the headline rate. In fairness, these accounts usually also come with a minimum deposit requirement, so as not to attract small savings pots which would not benefit from interest.

8 – Hanging onto your cash

Some instant access savings accounts come with a nasty bit of small print to effectively penalise you if you exercise that right to instant access. They pay you a much lower rate of interest in the month you make the withdrawal. This is akin to a withdrawal penalty and can result in a smaller interest payment at the end of the year.

If you need instant access to your cash and you are likely to make withdrawals during the course of the year, look for a savings account that does not penalise you for taking your money out. Some fixed term savings accounts even allow one or two penalty-free withdrawals during the course of the account term.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.

This ‘rainy day’ money is your financial safety net should you lose your job or have an unexpected bill to pay. It is the cash cushion that keeps you out of debt (and under your roof) when things go wrong financially. It is pretty important to have.

But how do you actually create this magical emergency fund? What are the steps you need to follow to put one in place?

Work out what you need

The first step in building an emergency fund is to work out what you need. Having a specific target to reach makes it easier to get there, plus you will know when you have reached it!

Your monthly household budget is a great starting point for this. Look through the list of everything you spend each month and then draw a red line through the items you could live without. What you are left with is your committed expenditure. In case of a dire financial emergency, this is the stuff you would have to keep paying.

Once you know this figure, you can easily see for how long your existing savings would last if your income stopped tomorrow. Make a note of this. Would it be a day, a week, a month or longer?

Your emergency fund target then becomes a multiple of your committed expenditure, less any existing savings you have earmarked for the purpose of an emergency. There are no hard rules when it comes to what this multiple should be. Whether you pick three months, six months or a completely different figure is up to you. What is important is that you pick a number and work towards it.

Work out where to put it

You will need a good home for your emergency fund, and ‘under the mattress’ probably isn’t the right answer! The most common place for an emergency fund is a savings account with a bank or building society. Assuming your savings with that institution do not exceed the £50,000 limit of the Financial Services Compensation Scheme (FSCS), you can sleep easily at night knowing that your money is completely safe.

The returns you get on the cash in your emergency fund are less important that the financial security of that money and knowing you can get access in the event of a real emergency. Interest rates on savings are really low right now, so shop around to get the best deal you can and keep the interest rate under review.

There are conflicting thoughts on whether or not to opt for a fixed rate savings account for an emergency fund. On the one hand, your money should be readily accessible. On the other, you should not need to access this money unless there was a real financial emergency. Putting the financial barrier of the loss of some interest between you and your emergency fund can make real sense for this reason.

Get building

Once you have your target amount and you have a suitable home for your emergency fund, get building. Unless you have a lot of disposable income to hand it will take time to build your emergency fund from scratch, but the sooner you start the sooner you will reach your goal.

Factor your savings towards an emergency fund each month into your household budget and monitor your progress towards the target amount. Depending on how you prioritise the existence of an emergency fund, you may want to put other financial priorities, such as saving for your retirement, on hold temporarily until your emergency fund is created.

Whatever you do, have a plan and make sure it is documented. Creating an emergency fund (if you do not already have one) should form an integral part of your written Financial Plan and it should be something you review on a regular basis.

Leave it alone!

Once you have built your emergency fund, you need to resist the temptation to dip into it for anything less than a real financial emergency. It helps here to write down the possible reasons for accessing this cash. If your ‘emergency’ doesn’t appear on your list, you cannot touch the money.

The only exception to this ‘leave it alone’ rule is to include your emergency fund in your annual financial review, to make sure it remains at an appropriate level and is earning a competitive rate of interest.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.

In simple terms, they are a long-term savings and investment account for the benefit of children. The account belongs to the child but they cannot access the money until their 18th birthday. Any capital gains or income within the CTF is free of tax for both the parent and child.

Government contributions

Shortly after your child is born, assuming they are eligible, you will receive a voucher to open a CTF account. For most children this voucher will be worth £250, but the amount is doubled to £500 for families on income support.

When your child reaches their seventh birthday they receive an additional Government contribution valued at £250 (or £500 if the family is in receipt of income support). Unlike the first payment at birth, the contribution at age 7 is paid directly into the Child Trust Fund account.

You have up to one year to select a CTF account for the voucher. After this time, HM Revenue & Customs will make the investment decision on your behalf and automatically invest your voucher in a new account. Because the CTF account and underlying investments selected by HM Revenue & Customs may not suit your individual circumstances, you should make the decision yourself on receipt of the CTF voucher.

Additional payments

In addition to the investment of the vouchers, it is possible to invest up to £1,200 each year into the account. These extra payments can come from parents, family or friends. It is important to note that the £1,200 a year limit applies to each account rather than each source of payment.

It is not possible to withdraw money – either the vouchers or any additional payments – from the CTF once it has been put in. Money can only be removed from the account by the child on or after their 18th birthday.

Different types of accounts

Whilst the concept of a Child Trust Fund is quite simple, making an investment decision is often challenging. There is a wide choice of around 70 different CTF account providers – including banks, friendly societies and fund managers. Choosing the most suitable CTF account for your child can be difficult.

There are different types of Child Trust Fund and you need to select the most appropriate type of account for your child. The two main choices are between a deposit (cash) CTF account or a CTF account invested in company shares (equities) and other types of investment.

Investing the CTF voucher into a cash CTF account is the simplest option. These operate just like a bank account; adding interest to the value of the account each month or year. This interest is paid gross and is not subject to income tax within the tax-efficient environment of a CTF account. The interest rate on offer will vary between different providers, so it is important to shop around to find the most competitive rate of interest.

The other main option is to invest in a fund invested in company shares. Unlike cash, this comes with the risk of capital loss and the value will fluctuate in line with the performance of the fund. However, the long-term returns from this type of investment are likely to be better than those available from cash. As a Child Trust Fund is a long term investment of eighteen years, this approach is often more suitable, assuming you can tolerate the risk.

Stakeholder or non-stakeholder?

Just to complicate things a little further, there is also the choice to make between Stakeholder and non-Stakeholder CTF accounts.

A Stakeholder account has certain features to ensure the overall charges are limited. The annual management charge must not exceed 1.5% a year. If you have £250 invested in your CTF account, the annual charge would not exceed £3.75 a year. In addition, the provider of the account must be prepared to accept additional top-up payments starting at £10.

A non-Stakeholder account does not have the same restriction on charges or contribution levels. For this reason, these are able to offer access to a wider range of investment funds. Whilst you might pay a little more for ongoing management, you do get the prospect of access to better performing funds, although of course this is not guaranteed.

Other factors

It is possible to swap between different CTF accounts in the future. This means that you can start by investing in riskier shares and then move to a more secure cash deposit as your child gets older, or vice-versa.

Whilst your child cannot access the CTF account until their 18th birthday, they are able to make their own decisions about how the money is invested from their 16th birthday. Bear in mind that, by this time, the fund could be substantial – particularly if you or other relatives have been making additional contributions each year. You may or may not relish the prospect of your 16 year old child making their own investment decisions about what could by then be a sizeable sum of money.

The consequences of making additional contributions and creating a sizeable Child Trust Fund account value is also something to consider. Many parents fear that the Child Trust Fund account they are building for their child will become a ‘motorcycle fund’ or used for something else other than the original intention. Because the value of the CTF account belongs to your child from their 18th birthday, you might wish to use a different types of savings vehicle (albeit without the associated tax benefits) for things like University funding or saving towards the deposit on a first property.

When your child reaches their 18th birthday, they now have the option of rolling the value of the CTF account into an Individual Savings Account (ISA) in their name. This would allow them to keep the money invested for the future in a similar tax-efficient environment.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.

The growing scale of the swine flu pandemic is focusing some minds on financial planning in the event of a large-scale emergency. It might not be flu, but another natural disaster or terrorist attack can quickly turn life upside down. We live in uncertain times, and there are steps you can take to create certainty when it comes to your financial planning.

Your emergency fund

Whenever you read an article about basic Financial Planning, there is always talk about building an ‘emergency fund’. After the eradication of expensive unsecured debt, creating a fund of money for a ‘rainy day’ is one of the most important financial planning steps you can take.

Experts often suggest that your emergency fund should be calculated by reference to typical expenditure over 3-6 months. If you spend £2,500 a month on the things you cannot live without, your emergency fund needs to be between £7,500 and £15,000. Depending on your risk profile and general outlook you might choose to keep more or less than this in a cash emergency fund.

Your emergency fund needs to be readily accessible. There is no sense in setting aside money for an emergency in an account which ties the money up for several months or longer. Under normal circumstances this means keeping the cash in an instant access account. In extraordinary circumstances, where the infrastructure of society starts to break down, you might want to have physical cash in your possession rather than money in the bank.

Something as simple as a widespread power cut could prevent you from withdrawing cash from the bank or using plastic to pay for goods for several days.

Keeping cash at home is not something we would usually recommend. There are several reasons why this is normally a bad idea. You might not get much interest on savings at the bank right now, but at least some interest is added. When your cash is at home it earns no interest and has no prospect for growth.

There is also the safety and security issue to consider. Cash at home needs to be locked away safely for protection from burglary, fire or flood damage. You will also need to check the terms of your home contents insurance and possibly notify your insurer about the presence of cash at your property.

Important papers

If you are anything like me, on a shelf somewhere at home will be several folders containing policy documents and statements. Mine are relatively well organised, but many of the clients we work with turn up to meetings with a pile of important paperwork in the less than glamorous surrounding of a plastic carrier bag.

In the event of a large-scale emergency where you have to vacate your home, how easily could you assemble the paperwork that mattered? Would you even be able to tell the difference between what you needed and what you could leave behind? There are similar considerations in the event of a fire destroying your home. What steps have you taken to preserve important financial documents now to ensure you can always access them in the future?

There are a couple of possible solutions to consider. You could invest in a fire-proof document safe for your home. These are not infallible, but they do offer a degree of protection against losing your financial paperwork.

An alternative option to consider is scanning all of your paperwork and keeping these copies ‘off-site’. This is my preferred option and I make use of a secure online storage solution which is regularly updated. I also keep a CD-Rom copy of my scanned financial paperwork at a different property. Both versions are encrypted to ensure that only I can access them in the future.

Preparing for the very worst

In the event of death, there are only two things you will want to have had in place from a financial planning perspective – adequate life assurance cover and a will. The life assurance policy will provide much needed capital or income for your family, and the will ensures that your assets are distributed according to your wishes.

These are two incredibly simple things to put in place, yet a high proportion of people continue to die each year without having written a will. Life assurance requires a brief meeting with a financial adviser to determine your cover requirements, the completion of an application form and occasionally some medical underwriting.

Before rushing to complete a life assurance application, think about the level of cover your family would actually need in the event of your death. It is also important to consider what cover you might already have in place. If you are an employee then you might benefit from death-in-service cover.

Writing your will is also simple, but you should always do this through a solicitor rather than taking the ‘DIY’ route. A poorly worded will can create even more trouble and financial aggravation for your family at the time when they need it the least.

Profiting from disaster

The start of the current flu-scare saw the share price of some pharmaceutical companies climb with airline and hotel company shares falling in value. This is an area I am not going to discuss, as I consider it to be unethical to try and profit from any form of human tragedy.

In addition to the moral issues at stake, trying to time the price fluctuations in a particular company or sector as a result of an emergency situation would be nearly impossible to do. It is far better to invest for the long-term in line with your personal financial objectives and risk profile.

The best time to plan

As you can see from the items covered in this article, preparing your finances for a major emergency involves some relatively straightforward steps. The best time to complete these steps is today because you never know what is around the next corner.

If you wait until you feel the importance of building an emergency fund, having some cash at home, backing up your important financial documents, taking out a life assurance policy and writing a will, it will probably be too late to do any of these things.

We should all prepare for the worst but expect the very best from life. At least then if the worst does happen, we will be in a better position than we were before to ride out the storm and survive (both from a physical and financial perspective).

Martin Bamford is site editor at BrilliantWithMoney and a Chartered Financial Planner with Informed Choice.

The best route to becoming brilliant with money will always vary depending on your background, current position and goals for the future. There are however five steps that often make up this roadmap.

1 – Sort out your budget

Before you do anything with your money, you need a budget. Write down what you earn and what you plan to spend. You then need to track both items. The aims of budgeting are to understand what you spend and, more importantly, widen the gap between your income and expenditure.

Until you are in the position where you consistently earn more than you spend, improving your overall financial position will always be an elusive dream.

2 – Get rid of your debt.

Put simply, your debt is a drag on your ability to achieve your future financial objectives. Unsecured debt, such as credit cards, is typically expensive. It also reflects an unhealthy and unstructured attitude towards spending. It is usually cheaper to buy something rather than borrowing; not to say more satisfying!

3 – Protect yourself.

The best laid financial plans can be quickly knocked off track by an unexpected catastrophe. The big three to think about are death, the diagnosis of a critical illness (such as cancer) and being unable to work due to an illness or injury.

Consider what impact each of these would have on your financial plans and then place them in order of priority before exploring suitable financial protection plans to insure yourself against the risks.

4 – Start saving.

The foundation of a good financial plan is a cash emergency fund. This needs to be readily accessible money and should be equivalent to between three and six months typical expenditure. This is the cash which will give you an all important breathing space in the event of a financial emergency.

5 – Think longer term.

The first four steps were all about taking action to deal with immediate issues. Step number five is all about the future. You need to start planning ahead for two main things.

Firstly, any large items of capital expenditure, such as a new car. You might fund these through saving if they are in the near future or investing your money if it is longer term. Secondly, you must plan for the day when your income from employment runs out due to retirement.

For people seeking to make a start on their road to becoming brilliant with money, these five steps are likely to be the most appropriate immediate strategy for getting started. There is a tendency when it comes to money management to over complicate things. Becoming brilliant with money should be reasonably simple. In fact, a simple financial planning strategy is more likely to succeed than one which is unnecessary complex to implement or sustain.

Martin Bamford is site editor at BrilliantWithMoney and a Chartered Financial Planner with Informed Choice.