Myths & misunderstandings that could leave people out of pocket

From Premium Bonds being risk-free to the Energy Price Cap being the maximum amount you’ll pay for your energy, we clear up some common financial misconceptions.

Be aware of financial myths

Forewarned is forearmed, as the saying goes.

We’d argue that’s especially true when it comes to financial matters, given how important it is that we make the most of our money during the enduring cost-of-living crisis.

With that in mind, we thought we’d clear up some financial myths that keep cropping up over recent years.

To some of you, these might seem obvious, but we’ve heard them mentioned repeatedly and seen them written in enough comment sections to know many people out there misunderstand them.

So, if these seem obvious to you, why not share them with someone who’s perhaps less interested in financial matters?

And, if there are any other common ones you’d like us to add, let us know in the comments section at the end.

'The Energy Price Cap is the maximum amount you'll pay'

The Energy Price Cap, which is set by the energy regulator Ofgem and is updated every three months, sets out the maximum amount you can be charged per unit of gas and electricity you use.

It is not, as some believe, the maximum amount you can be charged overall for your energy.

The cash figure that is published every three months to illustrate the latest Price Cap change represents what Ofgem thinks the average user will pay each year

If your household uses more than average, it’ll be higher than the average annual bill, currently estimated at £1,755.

What’s more, that Energy Price Cap figure also assumes you are on a Standard Variable Tariff, pay by Direct Debit and are a dual fuel customer.

If you aren’t, then your personal cost per unit of energy will be different.

Finally, there’s also a separate Price Cap figure for those on prepayment meters, with the typical annual bill currently estimated at £1,707.

Clearly, there’s enough fine print in there to see why some people might be confused by the Energy Price Cap.

The average household can knock £155 off annual bills by ditching the standard tariff for a fixed one. Switch now with Uswitch (opens in new page)

'Premium Bonds are risk-free'

One of the big draws of Premium Bonds is that they are effectively Government-backed and so offer a greater degree of security than traditional banks.

But just because your initial stake is secure, that doesn’t mean Premium Bonds are risk-free.

The Premium Bond prize rate is currently set at 3.6%, but because this average is heavily skewed by the small number of massive prizes handed out each month, most punters will actually earn less than that. 

Given that inflation also stands at 3.6% at present, it means the majority of savers holding the bonds are likely losing value in real terms.

Now, many savers will be happy to risk the value of their savings falling in real terms in the hopes of snaring one of those £1 million monthly prizes, but it’s important to at least be conscious of the likely sacrifice being made.

As an alternative, there are many savings accounts on the market offering a rate well above 4%, thus shielding you from inflation risk.

'Premium Bond deposits will be eligible for next month's draw'

One common misconception when buying Premium Bonds is that you will automatically be entered into the very next draw. 

In reality, you need to hold your bonds for a full month before they are eligible, so if you bought your bonds now (November), they will only be eligible to win from the January 2026 draw onwards. 

The only exception to this is if you already hold bonds and ask for any prize money you win to be automatically reinvested.

These funds will go straight into the next monthly draw.

'We no longer need to switch insurance regularly'

In 2022, the Government introduced rules banning insurers from charging loyal customers dramatically higher premiums while saving their competitive deals for new customers.

The business model works by luring you in with a truly competitive offer, then gradually bulking up your premium (and their profit) each year in the hope you can’t be bothered switching.

But just because the practice has been banned, it doesn’t mean you should stick with your existing insurer.

There are a lot of reasons why a rival will be cheaper.

They might have decided to target a specific type of customer, or they might have signed up to a deal with a price comparison site whereby they offer cheap premiums to people who buy through them.

Whatever the reason, it’s absolutely still worth shopping around each year for cheaper car or home insurance.

If you’ve signed up to a price comparison site, the process is relatively painless and you could save £100s.

'Regular savers will earn the headline rate on their pot'

Regular savings accounts have long offered the most generous rates, paying up to 7.5% at the time of writing.

But when you do take out and contribute to a regular saver, the total amount of interest you earn will be roughly half that of the headline rate.

This makes sense once you stop to think about it: you’re effectively earning that brilliant rate on £0 right at the start, and you only earn it on the full sum in the final month before it matures.

However, we’ve seen this issue raised many times by savers disappointed once they realise the actual amount they’ll earn from a regular saver.

Assuming you have savings already set aside on which you are looking to earn the maximum rate, your best solution is to place your pot in a top-paying access savings account first - these pay up to 4.55% - and then send the maximum-allowed amount across to your regular saver each month.

Doing this will guarantee you a better rate than any other savings account out there.

The catch, of course, is that you’re limited to sending relatively small sums to a regular savings account – usually around £300 a month or £3,600 a year.

'You won’t be eligible for vital help in retirement'

A report from the Department for Work and Pensions earlier this year estimated that almost two million UK retirees are in significant financial hardship.

Sadly, many of them are missing out on vital help that could massively improve their situation.

Pension Credit is a valuable benefit that’s worth up to £4,300 a year, depending on individual circumstance.

Yet it’s thought as many as 750,000 eligible retirees are failing to claim what they’re entitled to.

If you’re retired and in need of help, take a look at our Pension Credit guide to learn more about whether you could claim.

Or you can go directly to the Government and see if you could claim here.