Should you go for a SIM-only deal?

A lot can change in two years. Since 2010 we’ve seen fuel prices soar, economies slump and, on the mobile communications and devices front, a surge in popularity in tablets, two new iterations of Apple’s iPhone and a clutch of releases from other smartphone providers.

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But despite the pace of change and the speed with which technology moves on,  many contracts on the latest mobile phones force you to sign up for 24 months to get an affordable handset.

An alternative is to buy a handset outright and then sign up for a cheap SIM-only deal to put into the phone.

New handsets can be expensive, as we’re likely to see this month with the grand unveiling of the iPhone 5, but two-year contracts can sometimes cost more in the long run.

If you’ve got a fear of commitment and don’t want to be shackled to a lengthy contract, here’s a closer look at the SIM-only option.

The cost of contracts

The iPhone 5 should be unveiled on September 12, unless the hundreds of rumours from countless sources turn out to be wrong.

Those rumours point to a new 4-inch screen, a swanky new outer shell, improved cameras and many other upgrades from the iPhone 4S, which obviously means it will be an expensive piece of kit.

We don’t yet know how much the handset will cost, but if history tells us anything it could be anywhere between £450 and £550.

If you want to get your hands on the new phone, this either means signing up for a contract and getting the handset for a discounted fee, or shelling out for the full amount and sticking a SIM card in it yourself.

With the contract option you’re not only locked in for 18 or 24 months, you’ll also probably pay more overall. For example, when the iPhone 4S came out you could buy a 16GB one outright from Apple for £499.

The other option was to sign up for a contract and get the phone for a smaller initial price. For example, with Vodafone you could get one for £160 upfront – but on a £36 per month contract spanning two years.

Over 24 months that bumps the overall cost up to a whopping £1,024, just over double the cost of the handset.

If you’d have bought the phone outright and gone for a SIM-only deal, you could have saved money and been free to sell the phone and upgrade to the iPhone 5 this month.

SIM-only deals

If the iPhone 5 does go on sale for around £500, as its predecessor did, you may get a better deal by purchasing the handset outright and signing up for a SIM-only deal.

For example, Three’s Ultimate Internet SIM 200 deal is a 1-month rolling contract offering 200 minutes, 500 texts and ‘All you can eat’ data for £12.90 a month.

If we assume contracts on the iPhone 5 are similar to the 4S, then over two years the SIM-only deal from Three would work out cheaper.

Though iPhone 5 tariffs could be more expensive than those of the 4S were, let’s assume you’ll be able to get an iPhone 5 for £160 on a £36 per month, two-year contract once again.

At a total cost of £1,024, the contract would be a huge £369.20 more expensive than Three’s SIM-only deal over the 24 month period.

Of course this comparison is based on assumptions. The benefits of SIM-only are better illustrated when you have a phone already available.

Samsung’s feature-packed Galaxy S3 is available for ‘free’ on an 18 month contract with O2, if you’re willing to pay £72 a month. Over 18 months, this brings the total cost to £1,296.

If you bought the Galaxy S3 outright, it would cost you £499.95 from the Carphone Warehouse. Stick Three’s Ultimate Internet SIM 200 in it for 18 months and your total cost would come to £732.15, creating a saving of £563.85 compared to the O2 contract.

The O2 contract is a particularly high monthly cost tariff, but even if you go for a cheaper option, SIM-only can save you money.

You can get the S3 for £299.99 up-front, then £31 per month for 18 months from O2, totalling £851.99. That’s still £125.84 more expensive than buying the handset outright and using Three’s SIM-only deal over the same period.

Virgin has also launched a range of SIM only deals which it says provide better value for money than its competitors. For example, the £17 a month tariff offers unlimited data and texts as well as 1,200 minutes. If we take the Galaxy S3 example once again, the cost after18 months would be far cheaper at £605.99.

Better yet, you'll get far more minutes and texts with the Virgin SIM only tariff.

Is SIM-only really cheaper?

You can only say one deal is cheaper than another if they offer the exact same number of minutes, texts and data allowances. Given the breadth and complexity of mobile tariffs, it’s difficult to make a like-for-like comparison.

That said, The Three Ultimate Internet SIM 200 deal offers 100 more minutes than O2’s £31 a month tariff. On the one hand, O2 is offering unlimited texts while the Three SIM limits you to 500. On the other, the O2 tariff only gives you a data allowance of 1GB, whereas Three gives you an unlimited allowance.

What this shows is that the SIM-only deal here might be better for you if you use a lot of data on your phone, whereas the O2 contract might be better if you don’t want to be restricted on texts.

Let’s not forget that with SIM-only, you’ll have to find the cash to buy a phone outright, which, as I’ve shown, can be as much as £500. But you can always recycle your old phone to subsidise that cost though.
 
At the moment, our mobile recycling partner is paying £193 for a working, 16GB iPhone 4S. If the iPhone 5 launches for £500, you can use that to bring the cost down to £307 and then get a SIM-only deal.

The freedom of SIM-only

According to data from Carphone Warehouse, the number of people signing up for SIM-only deals went up by a quarter (26.5%) in the first half of 2012 compared to last year, perhaps indicating people no longer want to be tied into contracts.

One of the big plus points for SIM-only deals is that they’re a lot more flexible than pay-monthly contracts where the phone is included.

There are plenty of rolling 1-month SIM-only deals which allow you to leave with 30 days’ notice – which is great if you like to upgrade your handset regularly. This gives you the freedom to sell or recycle your handset more regularly, and probably get more cash for it as it will be newer.

Tablets too

Given that Apple’s iPad and other tablets have mobile web versions, it’s no surprise the phone networks stepped forward with tablet contracts and SIM-only deals designed for tablets.

The same logic applies as with phones. If you can afford the initial cost of buying the tablet outright, SIM-only may be cheaper and you won’t be bound to a contract, leaving you free to trade up with greater ease.

Hold the line

In my next article on telecoms, I’ll take a look at what is happening to landline charges.

BT announced in August that its prices will increase in January, and now Orange has followed suit. With cash-strapped households already contending with rising fuel prices, this adds extra strain to family finances, so I’ll be looking to see where you can get the best value phone deals.

Follow Mark on Twitter @MoneySuperMarkH

Please note: Any rates or deals mentioned in this article were available at the time of writing. We're free, independent and compare all UK credit cards, as well as offering exclusive deals you can't get anywhere else. Contact MoneySupermarket.com at Moneysupermarket House, St David's Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2011.

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