We no longer have jobs for life, so flexible financial schemes are a must.

Ways to survive on an uncertain income 

MORE than 4m workers in Britain do not know how much they will earn from one month to the next, according to research by First Active, the mortgage lender. Most are self-employed, but the growth in short-term contract work, plus an end to the job-for-life culture, means flexible, adaptable financial products are a must for millions. 

Traditionally, mortgages, pensions and many savings schemes - notably endowments - penalised any variation in payments or early encashment. But today, with increased pressure from the media and public, financial services companies have responded with a range of plans to suit the self-employed or transient worker. 

However, flexible savings, mortgages and pension plans are only part of the picture. Here we show you how to organise your finances for the new world of work. 

Emergency Cash 

Everybody, not just the self-employed, should make sure they have savings in an instant access account to cover emergency outgoings. This is even more important for people with varying incomes since they may need the financial cushion to smooth out their variable earnings. The best ongoing accounts at the moment include Legal & General's tracker (0500 111200) and Northern Rock's tracker (0845 6006767). 

Savings Plans 

Anybody with a variable income should avoid products that require regular contributions or block easy access to your savings. 

Experts suggest you steer clear of rigid savings schemes with set terms, such as 10-year endowments, maximum investment plans (Mips) and savings bonds. Very often, anybody investing in an endowment or Mip will not get back what they have paid in if they cancel their plan in the early years. 

Experts suggest you are better off investing in unit or investment trusts, which minimise the risk to your money by investing in a broad spread of stocks and shares. 

They are much more flexible than endowment savings plans, which can penalise you by forcing you to cash in your plan and impose other surcharges if you miss a payment. If you cash in early you will often not get back as much as you paid in. 

Unit trusts can also be held inside an individual savings account (Isa), which can be used to shelter up to £7,000 of investments from tax each year. 

Tracker funds have historically been the most consistent performers, and they are the cheapest, often with no initial charge and annual management fees as low as 0.3%. They replicate the performance of a chosen index, such as the FTSE 100 or All-Share. A recent study confirmed trackers were the most consistent funds: only two of 494 active British unit trusts have beaten the FTSE All-Share index every year for the past five years. 

Mortgages 

If your income fluctuates, it is essential to take out a mortgage that will allow you to make over or under-payments - or take payment holidays - without penalty or an adverse effect on your credit record. 

If you choose the wrong scheme, you could be penalised by up to six months' interest for paying lump sums off your mortgage. Flexible loans allow you to make overpayments, then borrow back money from this overpaid "pool" and even take breaks from payments. These features can be invaluable for anybody without a fixed income. Some apparently flexible schemes will prohibit you from borrowing back from any overpayments you have made. Skipton, Yorkshire building society and Scarborough all offer so-called "flexible" deals where you are barred from accessing overpaid capital. 

Flexible lenders, which charge interest daily and allow breaks in payments or overpayments, include Northern Rock, First Active, C&G Mortgages Direct and Sainsbury's Bank. 

Patrick Bunton of London & Country Mortgages, a mortgage broker, says: "Flexible mortgages are perfect for people whose income varies, but they come at a price. 

"They are typically about 1% more expensive than non-flexible loans, but if you use the flexible features they are well worth it." 

However, if you are not likely to overpay or use the scheme's flexibility, then opt for a cheaper, straightforward mortgage. 

Pensions 

Pension providers traditionally treat customers who stop and start contributions extremely harshly. If you switch your pension to another provider, it is not uncommon to see your fund value reduced by as much as 25%, and if you simply stop contributions without switching, high charges are taken out of any fund growth. 

Tom McPhail, pensions expert at Torquil Clark, an independent financial adviser, says: "People who just leave their pension without adding any further contributions are hit hard: your fund might be growing at, say, 10% a year, but about 3% of that is usually deducted in charges because you are not contributing." 

McPhail says that the introduction of the government's Stakeholder pension next year has already spawned some excellent value, flexible plans. Stakeholder will allow you to stop and start contributions without penalty. 

CGU is offering a scheme that charges nothing until Stakeholder is introduced next April, when it will revert to a stakeholder scheme and charge just 1% a year thereafter. 

However, if you already have a personal pension, you have to decide whether it is worth switching. Ask your existing personal pension provider for the fund value, its transfer value and the projected fund size on retirement. 

Then take the information to a stakeholder-friendly provider, show them the figures and ask what the projected fund value would be if you switched. If the new company gives you a higher figure, it could be worth transferring, though you should consult a financial adviser to help make the final decision. 

Beware of companies offering stakeholder-friendly plans - many are not good value. Ensure the provider you go to already offers the pension on identical terms to stakeholder.  
Insurance 

If you are worried about job security, it could be wise to take out income protection insurance to cover your mortgage. There are a variety of schemes available but they can have many restrictions for the self-employed or contract workers. 

Most policies will pay out for at least 12 months but there is a wait of about two months before payments begin. 

For ordinary workers, the cost of the premiums depend on how soon the policy starts to pay and for how long. 

Nationwide, for example, charges just under £18 to cover £350 a month for one year. For 24 months of accident, sickness and unemployment cover, the premium rises to just over £20 a month. 

Well covered 

William Stolten, from Ashford in Kent, was concerned about his family's welfare if he was taken ill or made redundant, so took out an income protection policy with Friend's Provident to cover his outgoings.

"You can never be too well prepared" he says. "I wanted to be sure that if there was a short term gap between jobs or if I was taken ill, all my outgoings would be covered. It gives great peace of mind."

Stolten, a recruitment consultant, is married with two children, and pays £51 a month for £460 a month worth of cover. "I consider it a small price to pay, especially when you have family to think of." 

Flexible with finance 

Gareth Waites, 32, from Tiptree in Essex, is a director of his own company, and has a salary consisting of both dividends and wages, so it can vary from month to month. Waites is married with triplets, Freya, Luke and Joe, who are just over 2 years old. He took a flexible mortgage with Standard Life Bank which allows him to overpay without penalty, and to borrow back from his overpayments or his equity.

He has already used the flexible facility to borrow against the equity in his home to build an extension, and makes regular overpayments.

"It is very convenient and I know that if I continue to overpay I will pay the mortgage off much earlier. I did not want a current account mortgage where your wages are offset against the mortgage each month - it made me uneasy." 

Sunday Times 2 July 2000